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US Senate Considers 'Outdated' Energy Tax Code

by Mike Godfrey, Tax-News.com, Washington

22 September 2014


At a hearing on September 17, United States Senate Finance Committee Chairman Ron Wyden (D – Oregon) suggested that, in any tax reform, technology-neutral energy tax policies should take the costs and benefits of different energy sources into account, but much of the discussion pitted the incentives given to fossil fuels against those for renewable energy.

In his opening statement, Wyden said that the costs and benefits of energy must include considerations "such as energy efficiency, affordability, pollution, and sustainability," and that "it's past time to replace today's crazy quilt of more than 40 energy tax incentives with a modern, technology-neutral approach," to produce "a new level of competition and fairness into the marketplace."

However, he also pointed out how "traditional sources benefit from tax incentives that are permanently baked into law, but clean energy sources are stuck with stop-and-go incentives that have to be renewed every few years. Congress has developed a familiar pattern of passing temporary extensions of those incentives."

Looking forward to "a clean energy future," Wyden noted that renewable energy "facilities and machinery take years to get up and running – especially in sources like hydropower, geothermal, and biomass. Predictable, level-playing-field tax policies could clear the way for America's clean energy sector to thrive at home and outmatch global competitors hungrily eyeing the multi-trillion dollar market for energy goods and services."

On the other hand, Orrin Hatch (R – Utah), the Committee's Ranking Member, questioned the Administration's "energy policy [that] boils down to a belief that that fossil fuels are bad, and that the federal government should enact policies to punish their production and use. … Instead of discouraging the domestic production of oil and gas, we should welcome the recent production increases that we've seen. Increases in the domestic production of oil and gas reduce our dependence on foreign oil and create many high-paying jobs."

He also cast doubt on the Committee's December 2013 energy tax proposal that was claimed to be technology neutral – "by picking carbon emissions as the standard for judging whether a technology would get federal dollars or not, the proposal is biased against fossil fuels such as coal, oil, and gas."

Hatch concluded that, as many energy tax issues are addressed in the "tax extenders" package (the temporary tax provisions that expired at the end of last year, and have yet to be renewed by Congress), those measures need to be dealt with as soon as possible. However, when Congress looks at tax reform, he hoped that all existing energy tax policies will be examined "under President Reagan's three criteria for tax reform: fairness, simplicity, and efficiency."

As a snapshot of the dichotomy of opinions given to the hearing by its witnesses, ex-Senator Don Nickles, Chairman and CEO of The Nickles Group, agreed with Dave Camp (R – Michigan), Chairman of the House of Representatives Ways and Means Committee, that some of the tax extenders should be extended permanently, but that "others, such as the wind production tax credit (wind PTC), should remain expired."

While warning against eliminating tax policies that benefit the oil and natural gas industry, such as the ability to deduct drilling costs, he called the wind PTC "an overly-generous subsidy supporting a mature industry which has expanded ten-fold in the last decade and now accounts for over 60,000 megawatts of installed generation capacity. … The wind PTC's subsidy is 30-to-50 percent of the average wholesale cost of electricity in most regions of the country."

On the other hand, Ethan Zindler, Head of Policy Analysis at Bloomberg New Energy Finance, stressed the way in which the wind PTC has "played a vital role in subsidizing and spurring the construction of US wind projects. … Its importance has been illustrated each time Congress has allowed it to expire without a quick retroactive reinstatement. Each time, installations have fallen sharply."

He also forecasted that "a somewhat similar cliff now looms for the solar sector, which enjoys the benefit of the investment tax credit (ITC) allowing developers to receive a credit equal to 30 percent of their project's capital expenditures. The ITC is now due to sunset at the end of 2016. At that time, when the ITC 'steps down' to 10 percent of capex, we anticipate a drop in solar installations similar to what we have historically witnessed with wind."

While "critics charge that these tax credits provide little motivation for these nascent sectors to improve their economics and become price-competitive," Zindler contended that "recent evidence suggests the wind and solar industries are rapidly reducing costs, in large part to compete with natural gas-fired generation."

TAGS: environment | Finance | Energy | tax | investment | economics | business | tax incentives | fiscal policy | energy | law | oil and gas | tax credits | United States | tax reform | business investment

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