Recent Senate decisions have brought a host of Democratic provisions to the fore, thus triggering what could be significant policy changes for the energy industry.
On Aug. 10, the Senate approved a bipartisan infrastructure bill 69-30, then hours later approved, in a partisan vote, a $3.5 trillion budget bill that will kick off negotiations for a massive reconciliation package that is intended to include the rest of the infrastructure initiatives left out of the bipartisan bill.
Energy policy is a key component of Democratic infrastructure policies, and Democrats have made their priorities for energy tax provisions clear. President Joe Biden’s “Green Book” of revenue proposals and the Clean Energy for America Act (CEAA), sponsored by Senate Finance Committee Chair Ron Wyden, D-Ore., propose very similar approaches to remaking energy tax policy.
These proposals could find their place in the reconciliation bill which is under discussion now. The focus is clearly on green energy at the expense of traditional energy incentives, and both the green book and CEAA would repeal nearly all tax incentives for oil, gas, and coal, including:
- A two-year amortization for geological and geophysical expenditures
- A seven-year cost recovery for Alaskan and natural gas pipelines
- Deductions for tertiary injectants
- Expensing for intangible drilling costs
- Percentage depletion
- Capital gains treatment of certain coal royalties
- Enhanced oil recovery credit
- Marginal wells credit
- Advanced coal project credit
- Coal gasification credit
- Exceptions for oil and gas publicly traded partnerships to avoid being taxed as C corporations
Michael Osina, a Grant Thornton partner in Tax Reporting and Advisory, identified that repealing the expensing of intangible drilling costs (IDC) to be the provision of most concern to oil and gas companies. Pete Stonis, also a Grant Thornton partner in Tax Reporting and Advisory, agreed as many clients he’s talked with have already been planning for this possibility.
“I think it’s going to affect companies who recently went through bankruptcy and had their net operating losses cut back, as well as their capital expense programs,” Osina said, “so they’re looking to become more cash-flow positive.” In such cases, losing an IDC deduction is going to put more pressure on managing cash taxes, as many of these companies haven’t paid cash taxes in years.
The overall focus on clean energy is unmistakable; Stonis pointed out that many large energy companies are already touting the moves they’re making to invest in clean energy and making that part of their business.
Democratic lawmakers are also discussing raising revenue from a tariff or tax on carbon-intensive imports. Few details are available on this potential “methane reduction and polluter import fee,” but it appears to be modelled on similar tariffs proposed in the European Union.
Other energy tax provisions in the Treasury Department “Green Book” includes:
- A carbon oxide sequestration credit covering facilities with construction beginning before 2031
- Resurrecting a Section 48C advanced energy manufacturing credit
- A production tax credit for qualified facilities where construction began before 2027
- Nuclear power facilities being allowed to apply or bid up to $1 billion in annual credit allocations
- An investment tax credit restored to the full 30% rate for construction beginning after 2021 and before 2027
- Creating a production tax credit for low-carbon hydrogen and a new credit for sustainable aviation fuel
- Increasing the cap on Section 30C alternative fuel refueling property credit from $30,000 per location to $200,000 per electronic charging device
The IRS also released guidance clarifying that a taxpayer can claim a Section 45Q credit for carbon capture even for dual-use properties and if the taxpayer does not own all the carbon capture equipment. All these proposals could end up in the reconciliation bill, though the $8 billion Section 48C tax credit allocation was removed from the latest draft of the bill.
Taken together, these provisions show a strong emphasis on encouraging the growth of the green energy industry. But until the majority of American energy is derived from something other than oil and gas, Stonis observed that these companies are still going to have to keep investing in oil and gas to produce what is needed for the economy.