Senate Finance Committee Chair Ron Wyden, D-Ore., unveiled legislation last week that would reform and enhance nearly all existing energy and fuel tax incentives.
The legislation is largely consistent with the ideas outlined in the Made in America Tax Plan that President Joe Biden proposed as part of his infrastructure initiative. Two dozen Senate Democrats have already endorsed the bill, marking it as a starting point for negotiations on the energy portion of the infrastructure bill. The legislative process is only beginning, however, and many aspects of Wyden’s plans could run into hurdles. There are both administrability concerns and potential cost issues.
The proposal would generally replace the Section 48 and Section 45 credits for various sources of alternative energy with a technology-neutral credit for producing electricity below an emissions threshold. A credit would also be available for combined heat and power systems based on emissions standards. Taxpayers could elect to claim a credit similar to the current Section 45 credit, which would be equal to 2.5 cents per kilowatt-hour for electricity produced in the first 10 years after a facility is placed in service. Taxpayers could alternatively elect to claim a credit similar to the current Section 48 credit equal to 30% of the basis. Certain transmission and power storage improvements could also qualify for the 30% credit, as could homeowners. The credits would begin to phase out once certain nationwide emission standards were reached.
Most significantly, the credit would be fully refundable and payable even at the pass-through level for both S corporations and partnerships. Such a change could significantly simplify tax equity planning. However, the bill also imposes labor standard in which at least 15% of hours would need to be performed by “qualified apprentices.”
Similar to the energy-generation provisions, the bill would replace the current alternative and biofuel credits for specific fuels with a new technology-neutral fuel tax credit that would offer a credit up to $1 per gallon for fuels with a “well-to-wheel” emissions profile lower than set standards. The credits would be refundable and phase out when nationwide emissions targets were reached.
The proposal would replace the current electric vehicle credit, which offers up to $7,500 per vehicle but phases out by manufacturer, with a new uncapped credit of 30% of the cost of zero emission vehicles. The credit would begin to phase out once electric cars represent more than 50% of annual vehicle sales.
The proposal would also reform incentives for energy-efficient homes and increase the Section 179D deduction for energy-efficient commercial building improvements from a maximum of $1.80 per square foot to $5 per square foot under a new sliding scale for energy efficiency.
Finally, the legislation would repeal a long list of tax incentives for “fossil fuels,” including:
- Two-year amortization for geological and geophysical expenditures (seven-year for certain taxpayers)
- Seven-year cost recovery for Alaska and natural gas pipelines
- Deduction 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
- Exception for oil and gas public traded partnerships to be treated as C corporations
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
Washington DC, Washington DC
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