Cold comfort for tax reformers?


Tax bill preserves much of the status quo

Expectations weren’t high last year that Congress would realize its advertised intention of creating a more straightforward federal tax code—with fewer deductions, fewer subsidies, and fewer loopholes in order to accommodate lower rates—or that a finished bill would reach President Trump’s desk by Christmas. But widespread doubt that there would be any legislative product at all, persistent through most of the year, was erased as 2017 drew to a close.

In a mid-December Milwaukee radio interview, House Speaker Paul Ryan called the bill “the most historic tax reform we’ve ever had,” promised a major middle-class tax cut, claimed 90 percent of taxpayers would be able to file their returns on a postcard-size form, and asserted the revisions would be “bigger” than the last major overhaul of federal taxation, the deal negotiated between Republican President Ronald Reagan and Democratic Speaker Tip O’Neil in 1986.

That most Americans will see reduced tax liability seems assured, though the postcard-sized form looks like an unrealized dream as much complication remains in the code. And for energy industries—where a host of subsidies makes it hard to know what’s economically competitive and what isn’t—at least for the time being, the biggest reform bill in more than 30 years mostly maintains the status quo.

“The more things change…”

Renewable energy developers worried in the weeks leading up to the tax bill’s passage, as subsidies for developers and owners and those who finance their projects appeared on track to lose much of their value.

A November Washington Post story sought to explain “Why the wind and solar lobby is terrified of the Senate tax plan,” and an online energy newsletter in December predicted the legislation would “throttle” renewable energy.

But developers’ worst fears were never very likely to be realized. The provision said by the Post headline to have “terrified” renewable advocates was the Base Erosion Anti-Abuse Tax, or “BEAT,” described by the newsletter Utility Dive as a device to “make it harder for corporations to dodge taxes by backing out tax credits from the calculations used to determine tax rates.”

The provision was seen as reducing the value of the production tax credit (PTC) for wind and the investment tax credit (ITC) for solar, both often traded by developers to large corporations and financial institutions in exchange for financing of wind and solar projects. It was feared that the BEAT would discourage the financiers’ participation.

Ironically, it was placed in the bill to address an unrelated issue that’s been central to tax reform discussions: the practice of “inversion” by U.S. multi-national corporations relocating their headquarters overseas to reduce their exposure to this country’s 35 percent corporate income-tax rate—the developed world’s highest. The new legislation reduces that rate to 21 percent, near the low end of corporate taxes internationally.

The final version of the bill was revised to ease renewable developers’ concerns. It allows energy companies to offset 80 percent of the BEAT, though some advocacy groups cited continuing uncertainty about tax credits being fully claimable in a given year.

Regarding previously established tax policies favoring wind and solar energy, the new legislation is most notable for what it doesn’t say. Again, for now the status quo prevails.

Under a compromise negotiated in 2015, the then-expiring PTC was renewed but its value was set to decline 20 percent annually, phasing out in 2020. The House version of tax reform retained the phase-out and eliminated an inflation adjustment that had raised the credit’s value to 2.3 cents per kilowatt-hour (payable for 10 years and based on the start of construction). Dropping the inflation adjustment reduced the credit’s initial value to 1.5 cents per kilowatt-hour, the amount originally authorized when the PTC was created 25 years ago.

In the final reform bill, those provisions were left out entirely, keeping the 2015 arrangements intact.
The 30 percent ITC for solar generation, also part of the 2015 compromise, was similarly left out of the December bill and remains scheduled for phase-out in 2022.

Credits for geothermal, small wind, microturbines, and other alternative energy sources were allowed to expire in the 2015 compromise and were left out again last month. The idea of tax credits to sustain nuclear generation and all the other renewable energy provisions on which the December legislation is silent is being talked up for action in a separate bill early this year.

That would come in the form of a “tax extenders” package, the unpretty legislative device that’s grown notorious in recent years for midnight horse-trading to protect laundry lists of expiring subsidies. Love or loathe the individual tax policies, this is an area in which December’s mammoth tax bill falls conspicuously short of systemic reform, pointing instead toward the continuation of familiar legislative sausage-making.

As a Utility Dive writer pictured it in mid-December, “The possibility of a separate tax credit extender bill has attracted a range of lobbyists eager to add their projects to the list of credits to extend or even to create,” possibly including a credit for existing coal-fired plants.

“…the more they stay the same.”

A great deal—potentially including congressional majorities—will depend on the success or failure of Speaker Ryan’s hopes for the tax overhaul making the U.S. economy more competitive internationally and accelerating job-creation. For good or ill, the most noteworthy aspects of the tax-code revisions relate to matters outside the energy realm.