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Obama Proposes Tax Reform, Making Renewables Credits Permanent

The US Federal Government is making another pitch for business-tax reform, and within that thrust it is underscoring its support for renewable energy.

The proposed adjustments in the Framework for Business Tax Reform incorporate five themes, including lowering the corporate tax rate from 35 percent to 28 percent, and to 25 percent for manufacturing "and even lower for advanced manufacturing activities." The current Research and Experimentation (R&D) tax credit's lower option of 14 percent rate in excess of a base amount would be hiked to 17 percent and made permanent.

For renewable energy sectors, the key part of the President's proposal also includes making the temporary tax credits for renewable energy production permanent -- and making it refundable. Doing so will "provide a strong, consistent incentive to encourage investments in renewable energy technologies," according to the Treasury Department. (Here's the press release and full PDF of the proposed business tax reforms.)

[...] This Framework recognizes that, as we expand manufacturing in the United States, the tax code should encourage doing so in way that is sustainable and that puts the United States in the lead in manufacturing the clean energy technologies of the future. This will create jobs here at home and can also have important spillover benefits. Moving toward a clean energy economy will reduce air and water pollution and enhance our national security by reducing dependence on oil. Cleaner energy will play a crucial role in slowing global climate change, meeting the President's goal of producing 80 percent of our nation's electricity from clean sources by 2035.

Renewable energy sectors have shivered over the expiration of the production tax credit; the Section 1603 grant program's expiration at the end of 2011 has been criticized by the solar sector, while wind energy giant Vestas has already warned that without a wind-friendly tax credit it will drop its US manufacturing, resulting in hundreds of layoffs.

Here's how Treasury Secretary Tim Geithner sums up the need for tax reform, and changing the rules around which industries get subsidies:

Our business tax system is not just outdated -- it is unfair and inefficient. Our corporate tax rate is now on pace to become the highest among all developed economies. The rate is high in order to pay for a tax code full of special benefits for certain industries and certain activities. You can call these tax preferences, tax expenditures, loopholes, incentives, or tax benefits. But whatever you call them, they are subsidies. They are spending through the tax code. And they are expensive, costing billions of dollars a year. Because many of these subsidies flow to certain industries and not others, they are fundamentally unfair. Right now, companies in some industries pay two or three times the effective tax rates as companies in other industries. For example, the effective tax rate on an investment in buildings or other structures by a manufacturing company might be twice as high as the rate that applies to an oil or gas company. These subsidies distort choices about where companies should invest, and they distort the allocation of capital.

There's still plenty of debate about the value of energy subsidies. "Grid parity" has long been the Holy Grail of renewable energy, but simultaneously criticized as a distracting pipe dream given the even bigger subsidies enjoyed by oil and gas. Some argue that whether tax credits do more harm than good compared to other mechanisms to support renewable energy. These latest tax reform proposal, some applaud, at the very least advance the policy discussions; others criticize them as too weak, unbalanced, and ripe for abuse. (One quips that "reintroduction of the McRib would qualify McDonald's for a tax break.")

Geithner says he will "meet in the coming weeks" with Senate leaders on both sides "to begin the process of building a bipartisan consensus." What seems clear is that tax reform, and a focus on renewable energy, is now squarely on the table as a political football during this presidential election season. And there's still a long way to go until any of this is agreed upon.

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