Clean Energy Tax Bulletin

By: Timothy Urban, Liam Donovan, and the Policy Resolution Group

Introduction

With dozens of temporary energy tax provisions set to expire at the end of 2020 and another tranche of proposed enhancements, fixes, and new provisions queued up for COVID stimulus negotiations, now represents an important moment to take stock of the underlying political and substantive dynamics at play. Our note unpacks these dynamics, in addition to discussing the compressed timeframe for action lawmakers face, assessing when, how, and if Congress might extend clean energy tax provisions.

The Congressional Schedule and Additional Opportunities for Legislating in 2020

With fewer than 30 working days between now and the November elections, calendar dynamics will play a key role in determining how much time congressional leaders can spend on a variety of legislative vehicles.

Two key periods remain to move energy tax packages: The first in July, and the second in September after the traditional Congressional August recess. Since both chambers are scheduled to be in session for the last two weeks of July, and since that work period abuts the August recess, many observers speculate that may be the period that lawmakers attempt to negotiate the next, and perhaps last COVID-related bill.

Finally, after November elections, the “Lame Duck” session provides another opportunity for lawmakers to resolve unfinished business before the end of the year and the end of the 116^th Congress. However, such legislating is purely optional, dependent upon the election outcomes, and is in no way assured. For that reason, many observers avoid counting on the possibility of a lame duck tax package.

Clean Energy Political Dynamics

Exacerbated by the overarching debate over climate change and pre-election squabbling, the ongoing partisan stalemate over clean energy incentives has been especially difficult for legislators to resolve. While the current law’s conventional energy tax benefits are generally permanent, most of the sector- or technology-specific clean energy incentives are temporary and require frequent legislative extensions. By blocking extension of these temporary provisions (the last retroactive 2019 extension came after 23 months of lapsed credits), and by championing various phase-downs and phase-outs, opponents hope to chip away at clean energy companies’ interest in extending them. At the same time, with the economic distress and COVID-induced uncertainty, clean and renewable energy companies assert that they need federal help now more than ever.

Will Tax Provisions Get a Ride on the Senate Energy Bill?

Exacerbated by the overarching debate over climate change and pre-election squabbling, the ongoing partisan stalemate over clean energy incentives has been especially difficult for legislators to resolve. While the current law’s conventional energy tax benefits are generally permanent, most of the sector- or technology-specific clean energy incentives are temporary and require frequent legislative extensions. By blocking extension of these temporary provisions (the last retroactive 2019 extension came after 23 months of lapsed credits), and by championing various phase-downs and phase-outs, opponents hope to chip away at clean energy companies’ interest in extending them. At the same time, with the economic distress and COVID-induced uncertainty, clean and renewable energy companies assert that they need federal help now more than ever.

Expiring Renewable Energy Tax Provisions

The large number of key clean energy tax extenders that expire at the end of 2020 will likely be a topic of debate during the “Phase 4” COVID package. The list below identifies the dates and corresponding key clean energy tax provisions that must be addressed in the coming months or else they risk lapsing.

Provisions Expiring on 12/31/2020

• IRC 25C - Credit for certain nonbusiness energy property;
• IRC 30B - Credit for qualified fuel cell motor vehicles;
• IRC 30C - Credit for alternative fuel vehicle refueling property;
• IRC 30D - Credit for two-wheeled plug-in electric vehicles;
• IRC 40 - Second generation biofuel producer credit;
• IRC 45L - Credit for construction of new energy efficient homes; and
• IRC 179D - Energy efficient commercial buildings deduction.

 

Provisions Expiring on 12/31/2021

• IRC 25D - Credit for residential energy property.

 

Provisions Expiring on 12/31/2022

• IRC 6426 and 6427 - Excise tax credits and outlay payments for alternative fuel; and
• IRC 40A - Income tax credits for biodiesel fuel, biodiesel used to produce a qualified mixture, and small agri-biodiesel producers.

 

Provisions Expiring on 1/1/2022

• IRC 48 - Solar Energy Credits.

 

Provisions Expiring on 1/1/2024

• IRC 45Q - Credit for carbon dioxide sequestration.

 

Trump Administration Renewable Tax Strategy

The Trump administration has frequently expressed skepticism of temporary tax provisions, especially clean energy tax incentives. The Administration’s budget proposals have routinely failed to call for extensions of these expired and expiring tax credits. For example, the Administration’s fiscal 2021 budget request proposed the elimination of the qualified plug-in electric drive motor vehicle credit, the energy investment credit, the residential energy efficient property credit, in addition to repealing accelerated depreciation rules for renewable energy property. Further, during delicate year-end bipartisan negotiations with congressional leaders over the 2019 year-end $1.4 trillion spending package, the Administration reportedly was reluctant to support inclusion of straight extensions of the credits that had been expired since 2017, and was accused by progressive negotiators as the key impediment to adoption of new provisions such as offshore wind credits.

Amid the COVID-induced economic recession, the Administration has taken some steps to provide tax regulatory relief to renewable energy companies. Principally, the Internal Revenue Service (IRS) responded to pressure from trade groups and lawmakers by modifying IRS guidance for Internal Revenue Code (IRC) Section 45 and 48 tax credits to provide companies with additional flexibility. Specifically, IRS extended the Continuity Safe Harbor for both the production tax credit and investment tax credit by a year for projects beginning in 2016 or 2017, and extended the 3½ Month Safe Harbor for services or property paid for by the taxpayer on or after September 16, 2019 and received by October 15, 2020.

Congressional Energy Tax Proposals

Lawmakers in the 116th Congress have introduced a variety of bills to address the expiring tax provision issues, yet few have gained traction. Not only do many have legislative fixes, but many of them also attempt to modify the credits to account for the changing market and new technologies. The bills listed below are some of the most popular and widely supported by both Members of Congress and relevant stakeholders. However, given the apparent stalemate with Senator Murkowski’s AEIA effort, there seems to be no clear way forward for Congress with these proposals.

U.S. House of Representatives

H.R. 3961, Renewable Energy Extension Act: This bill extends the energy investment tax credit at 30 percent for five years for renewable energy and efficiency projects.

H.R. 5523, Energy Sector Innovation Credit Act: This bill creates technology-neutral production and investment credits to incentivize “first-of-a-kind” clean energy technologies on the grid.

Discussion Draft, the GREEN Act: This discussion draft extends a variety of tax credits to promote renewable energy production, increase building efficiency, and increase deployment of zero-emission vehicles and infrastructure.

H.R. 2704, The Renewable Energy Transferability Act: This bill would expand investors for existing renewable energy incentives and drive renewable deployment through limited transferability for ITCs and PTCs.

U.S. Senate

S. 1068, Clean Energy for America Act: This bill consolidates all existing renewable incentives to create long-term, technology-neutral tax credits for production of clean electricity, clean transportation fuel, and energy efficiency.

H.R. 2096/S. 1142, The Energy Storage Tax Incentive and Deployment Act of 2019: This bill extends ITCs to batteries and electricity storage. This in turn would allow more renewable energy into our electric grid.

H.R. 4506/S. 2588, Home Energy Savings Act; H.R. 4646/S. 2595, New Home Energy Efficiency Act: This bill extends and modifies the IRC 25C incentive for homeowner efficiency improvements, the IRC 45L incentive for energy efficient new homes, and the IRC 179D deduction for energy efficient commercial and multifamily buildings.

Sen. Ron Wyden AEIA Tax Amendment. This amendment, put forth by Sen. Ron Wyden (D-OR), addresses many of the expiring tax provisions for years to come. The amendment would make the following changes, among others:

• IRC 30D - Expands the OEM cap;
• IRC 30B - Extends the credit through 2024;
• IRC 48
  • Reduces the existing PTC or ITC for wind facilities that commenced construction after December 31, 2016;
  • Creates a separate credit for offshore wind facilities;
  • Reduces the ITC credit values for solar, fuel cells, small wind facilities property that begin construction after December 31, 2019;
  • Extends the ITC for three years through December 31, 2024;
  • Delays application of reduced credits rates until January 1, 2023;
  • Increases the credit rate for geothermal energy property to provide parity with solar energy, fuel cells, and small wind;
• IRC 25C - Extends the credit through 2024 and updates the credit to reflect improvements in standards;
• IRC 25D - Expands the residential energy credit to provide tax credits worth up to 30% for efficient biomass thermal property;
• IRC 45 - Extends the renewable energy PTC through 2023 and retains the 40% reduction for wind facilities;
• IRC 7704 - Allows partnerships earning income from renewable energy to be exempted from being taxed as corporations;
• IRC 179D - Permanently extends the deduction for energy efficient commercial buildings;
• IRC 45L - Extends the credit through 2022 and updates the credit to reflect improvements in standards; and
• IRC 25D - Expands the residential energy credit to allow standalone energy storage property to qualify.

 

In recent days, there has been a push to include a clean energy stimulus package in the House Democrat’s infrastructure bill, the INVEST Act. Rep. Earl Blumenauer (D-OR) is currently circulating a letter to allow energy tax credits to be received as direct payment due to the need for cash flow because of a dramatic loss of revenue from the pandemic. Additionally, Democrats have contemplated including a version of the GREEN Act in a forthcoming tax title that will accompany the infrastructure bill. The original iteration of the GREEN Act proposed five-year prospective extension of expiring energy provisions ranging from investment tax credits under IRC 48 and 25D, respectively, and production tax credits for wind (at the reduced 60 percent phase-down rate) and other eligible technologies under IRC 45, to enhanced and reformed energy efficiency incentives for residential property (IRC 25C), new homes (IRC 45L), and commercial buildings (IRC 179D), to fuel cell electric vehicles under IRC 30B and alternative vehicle refueling infrastructure under IRC 30C.

However, any push to aid the clean energy sector has been met with skepticism from House and Senate Republicans. Some have gone so far as to denounce the effort, such as Environment and Public Works Chair John Barrasso (R-WY) who penned an op-ed stating “it is a laundry list of liberal priorities.” Rep. Garret Graves (R-LA), Ranking Member on the Select Committee on the Climate Crisis, stated that Democrats must find a new strategy to make the clean energy sector less reliant on Chinese rare earth minerals and materials.

Industry Support and Proposals

There is almost complete consensus among the renewable energy sector stakeholders that the clean energy tax incentives must be extended in order to boost the clean energy economy, especially credits expiring at the end of 2020.

Support to extend tax provisions like the IRC 25C credit is not limited to the renewable energy sector. For example, energy efficiency organizations such as the Air Conditioning Contractors of America (ACCA) support expanding the credit as well. Much like the renewable energy sector, the energy efficiency sector was hit hard by the COVID-19 pandemic. In ACCA’s proposal, the trade group calls for the adoption of the bipartisan Home Energy Savings Act of 2019, which would modify and expand the IC 25C credit for homeowner efficiency improvements. Expanding the IRC 25C credit and others like it would create more jobs in the heating, ventilation, air conditioning, and refrigeration field which makes up the largest portion of the energy efficiency sector. This is just one example of a clean energy incentive receiving a broad coalition of support

Conclusion

Lawmakers have both the legislative language and legislating opportunities they need to extend, and potentially enhance, energy tax provisions that will otherwise expire in 2020 and beyond. What remains to be seen is whether Congress will muster the political will and compartmentalize energy tax provisions from broader partisan debates about climate change and tax issues that have clouded the conversation. It is still too early to tell whether energy tax provisions will be addressed by one of the packages already under consideration, in a new package altogether, or as a part of a larger infrastructure package. PRG is following these issues very closely and encourages clients to reach out if these issues are of interest.