U.S. Tax Priorities Sack Big Wind

“The Senate bill should serve as the PTC/ITC blueprint for the final bill…. [Such reform] is an important step, but only first step, toward a level-playing-field between electrical energies that will, longer term, improve grid reliability coast-to-coast, border-to-border.”

After 25-years of subsidy-driven financing, the wind industry is entirely reliant on tax-equity investors, willing to accept tax credits in return for funding a significant percentage of their project costs. Tax equity now accounts for up to 60% of the capital needed to construct a typical wind facility. The pool of investors with enough passive income to qualify for wind PTCs is limited and includes the largest financial institutions such as JP Morgan, Bank of American, Citi and even Google.

Said bluntly, Main Street Americans are coughing up billions annually to help the richest Wall Street bankers avoid paying their taxes. The Senate tax bill that passed this weekend could spell an end to this massive wealth-transfer program.

Senate Tax Provisions

Unlike the House bill, which triggered an explosion of protests over lawmakers penning an amendment to the wind PTC, the Senate bill takes a different approach. It leaves the PTC phase-out intact but includes other provisions that level the playing field by reducing the use of deductions and tax credits generally available to the super rich.

The two provisions in the Senate bill that most impact wind energy investors are the BEAT and AMT.

1. Base Erosion Anti-abuse Tax (BEAT)

The Base Erosion Anti-abuse Tax or BEAT, coupled with the lower corporate tax rate (20%), is intended to disincent businesses with foreign affiliates from parking their taxable income offshore while shipping their foreign (deductible) expenses here as a means of lowering their US tax liability.

This has been an issue for years and one that both the house and senate bills address but in different ways. The BEAT is not directed at the PTC/ITC, but how it’s calculated [1] could result in multinational investors losing access to hundreds of millions in wind and solar tax credits produced in any given year. This provision applies to large corporations and financial institutions ($500+ million), and it’s expected to save taxpayers $137.6 billion over 10 years according to the Joint Committee on Taxation.

2. Alternative Minimum Tax (AMT)

A corporate Alternative Minimum Tax, or AMT, was removed in the original Senate bill but added back in order to pay for a $40 billion shortfall arising from other provisions introduced during the late-night negotiations. Generally, the AMT is an ‘alternative’ tax base for taxpayers able to use significant deductions and tax credits to lower their tax liability. With the corporate and AMT tax rates both at 20%, it is likely that most corporations will be subject to the AMT.

Under AMT rules, the PTC is available only during the first 4 years, not 10 years, of an operating wind project. AMT rules also impose less generous depreciation schedules

Big Wind in Panic

Immediately after the Senate version was released, AWEA touted the bill as a boon for big wind. This, in spite of the BEAT provision being in the original bill and openly discussed by the Finance Committee. The leap to judgement was based solely on the Senate leaving the PTC phase-out unchanged.

The mood quickly turned hostile last week, and the AWEA ‘war room’ fully engaged after the significance of the BEAT provision hit home. Senator Grassley was dispatched to push for special treatment of the PTC/ ITC but that effort failed, likely due to the enormous price tag tied to wind tax credits. Big wind’s mission now is to whip up a frenzy in the media and among Congressional Democrats and, if necessary, destabilize the bill in these final weeks.

We’re already hearing how the Senate acted in the heat of the debate and did not understand the implications of its actions. Such claims are grossly unfair and simply not true. Just reviewing the detailed summary of the bill, it’s evident that the policy changes were intentional, they’ve been in the works for a long time, and were crafted by very smart, experienced tax lawyers who understood the overall impacts.

Unfortunately, billions in public money are at stake, which means the rhetoric will be non-stop until the debate is finally over.

Next Steps

The next step is for Congress to reconcile the differences between the House and Senate versions. Both bills are similar, but with regard to the wind industry, they differ in several key ways as described in the table.

The wind industry always, and predictably, “cries wolf” every time tax changes are in the works, making it tough to assess what’s true and what’s rhetoric. But even if the Senate tax bill reduces the value of tax credits for the mega-rich, and slows the flow of project funding, wind developers should not be surprised. They’ve known since 2012, when the PTC and Section 1603 grants were scheduled to expire, that the public’s tolerance was waning. Back then, eight of the largest turbine manufacturers admitted they will adapt and grow, without the PTC. If they dropped the ball, that’s not our problem.

The Senate bill should serve as the PTC/ITC blueprint for the final bill. Any changes recommended by the conference committee should be addressed swiftly and fall within the envelope of the Senate bill. This is an important step, but only first step, toward a level-playing-field between electrical energies that will, longer term, improve grid reliability coast-to-coast, border-to-border.

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[1] The law, as written, requires corporations compute 10% of their taxable income after adding back any payments made to foreign affiliates and compare this figure to the corporation’s regular tax liability reduced by all tax credits (including PTCs and ITC) other than an R&D tax credit. If 10% of the taxable income is less than their tax liability, the federal government will collect the gap in the form of a tax.