Senator Jeffrey Merkley (D-OR) along with 26 of his Democratic colleagues and Angus King (I-ME) wrote to Senators Baucus and Hatch of the Finance Committee to advocate for renewable energy tax incentives in the context of tax reform. The letter is available here.
The letter is not specific as to how long tax credits should be extended for, but it is clear that the credits would not be permanent as it references changing the sunset rules for all technologies from the placed in service date to the start of construction date.1 In addition, the letter does not reference MACRS depreciation. MACRS can be worth almost as much to a project as tax credits, so it is odd that the letter left that out. Is it a signal that in the tax reform process the Senate Democrats are prepared to trade MACRS for tax credits? The combined implication of these two references in the letter is somewhat concerning. Are the signatories of the letter planning to trade MACRS which is a permanent provision of the Internal Revenue Code for tax credits that would be “long-term” but nonetheless have a sunset date?
The letter advocates for continuing both the production and the investment tax credits because different technologies are better suited for one or the other. For instance, wind is less expensive and more efficient than solar, so it is typically better served by the production tax credit that pays 2.3 cents per kilowatt hour of production;2 while solar is better served by the investment tax credit that is based on the tax basis (or in some instances, the fair market value)3 of the solar project.
The letter’s discussion of expanding access to low cost of capital also appears to advocate for expanding the master limited partnership (MLP) rules4 to apply to renewables, but the letter does not refer MLPs directly.
In addition, the letter’s reference to “creating policies that attract more investors to the tax equity market” hints at support for relaxing the passive activity loss rules.5 Those rules generally preclude the participation of individuals in the clean energy tax credit market, but the letter does not refer to those rules directly.
Here are some key excerpts from the letter:
- “Tax credits like the production tax credit that only last a year or two and then lapse, only to return again with no apparent predictability, are not effective for projects that can take five years to plan.”
- “[A]ll clean energy tax credits should use a consistent eligibility standard based on the beginning of construction, rather than the time that this project is placed into service. This … greatly enhances the predictability and certainty of the credit”.
- “[I]t will be important to also continue different types of tax incentive structures to accommodate unique needs across different technologies and project types.”
- “[H]ighly capital intensive projects such as solar and offshore wind prefer an investment tax credit in order to deploy, whereas on shore wind … deploy[s] more effectively with a production tax credit.”
- “[T]he PTC and ITC would be significantly more effective tax credits if they could be monetized more easily, either through payments in lieu of tax credits, or by creating policies that attract more investors to the tax equity market.”
The letter also includes some noteworthy statistics about global economic activity in renewables: “while global energy investment fell by 11% last year, China advanced to become the world leader in clean energy investment, attracting $65.1 billion in investment. In the United States, clean energy investment declined by 37%, to $35.6 billion.”
3 Internal Revenue Code Section 50(d)(5) (referencing old Code Section 48(d)) that provides for an election to pass-through the investment tax credit to a lessee that calculates its investment tax credit based on the fair market value of the property, without regard to the lessor’s tax basis in it or the lessee’s rent payments for it.
5 See [Project Perspectives “Hunting Unicorns” article] that discusses the application of the passive activity loss rules to individuals that want to make tax-advantaged investments in renewable energy projects.