The Wrong Answer to Tax Reform

For many years, and particularly since the Energy Policy Act of 2005, U.S. federal income tax policy has served a dual function as both tax and renewable energy policy. However, last month House Ways and Means Chairman David Camp (R-MI) released an expansive tax reform proposal in which a number of credits and deductions for renewable energy technology were recommended for repeal, effectively rewriting renewable energy policy by a proposed elimination of renewable energy from the federal tax code.

While Representative Camp has attempted to frame the cuts in his “Tax Reform Act of 2014” as little more than wasteful spending and incentives in pursuit of a lower overall tax rate, in reality his proposal is a risky bid that not only stifles, but also imposes competitive barriers around America’s renewable energy advancement. 

Unlike traditional fossil fuel-based energy, renewable energy technology, while established, is still growing and experiencing a steady pace of evolution, innovation, and integration into America’s energy landscape. In fact, today’s renewable energy industry is representative of America’s innovative research and development and cutting-edge technological leadership that will prove to be a positive force in global advancement.

Despite earlier fears, the proposed cuts to oil and gas deductions were not as severe as those proposed to renewable energy. As written, Camp’s draft will harm not only the rate of energy technology development in the US, but also the commercialization of renewable energy throughout the U.S. and beyond. While the Chairman’s proposal maintains the lucrative intangible drilling costs deduction for fossil fuels, it would repeal and phase-out renewable energy provisions and tax credits, as well as marginalize renewable energy financing options by maintaining an exclusion from master-limited partnerships (MLPs).

The U.S. tax code should reflect both the times and the needs of the nation’s energy users, while balancing short term necessity with the perpetual protection of America’s resources and best interests. The proposal by Representative Camp eliminates support for renewable energy, thereby buoying the competing fossil fuel industry and ignoring a thriving and growing sector of our economy.

With this tax proposal, the Chairman has asked all Americans, all industries and all sectors of the economy to sacrifice in order to get to a 25 percent overall tax rate. Yet only a few industries are given any form of reward for that sacrifice. The renewable energy industry is being asked to make a sacrifice of 100 percent without any benefit in return, while other energy sectors get an effective windfall. Dropping the rate to 25 percent will not encourage investment in renewable energy simply because investment and financing decisions are not made on the basis of overall rates.  Rather, decisions are made based on current U.S. tax law that allows investors to recover their capital investment rapidly so that capital can be re-deployed quickly. 

Fortunately, Chairman Camp’s proposal for overall tax reform was not well received by Democrats or Republican leadership, and hopefully this extreme proposal will die this session. However, tax reform must continue to be a legislative priority for both parties that should go back to the drawing board and draft effective legislation that will incentivize our clean energy future with smart policy that stimulates rather than strangles this critical industry.

Lead image: Wrong in the shape of a red X via Shutterstock

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Lee Peterson is a licensed attorney and Senior Tax Manager for CohnReznick’s National Renewable Energy Practice. To date, Lee has been a critical tax advisor in over 10 billion dollars of renewable energy projects within the U.S. and its’ territories. He is responsible for thought-leadership and governmental affairs and his clients include the U.S. Department of Energy, Fortune 100 companies, state and local governments and domestic and foreign renewable energy project developers and manufacturers. Lee also advises the nation’s top financial institutions regarding their tax equity investment structures. Lee has published numerous articles in both the traditional and trade press, including, North American Windpower and Solar Industry magazine and he is regularly quoted in the media. Lee is also the author of numerous white papers on a wide range of critical renewable energy finance and tax topics and is a regular speaker at national professional education and industry events dealing with renewable energy policy, tax credit finance and federal and state tax policy. Lee volunteers hundreds of hours, pro bono, assisting non-profit renewable energy organizations, federal and state legislators as they seek to improve and implement new energy policies. For 10 years, Lee was an adjunct professor at Clayton State University and is a guest lecturer for the J. Mack Robinson MBA program at Georgia State University. Lee has also served as instructor for the State Bar of Georgia continuing legal education seminars.

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