As the United States continues to experience historic challenges resulting from the COVID-19 pandemic, recommendations for federal policymakers have been proposed by many organizations to support the recovery and rebuilding of the U.S. economy. Congress has an opportunity to advance investments that will have near and long-term benefits, particularly in the areas of infrastructure and energy technology. The Bipartisan Policy Center has identified several specific recommendations that are uniquely positioned to help Americans through the current crisis while also rebuilding our nation’s traditional strengths in innovation and technology leadership.
One of these proposals is to provide direct cash payments to clean energy developers in lieu of tax credits. Investment and production tax credits have historically been successful in supporting clean energy projects. However, in the context of a larger economic slowdown, tax equity markets tend to shrink and capture a higher proportion of the available credit value as a transaction cost. Implementing direct pay could help address these issues. A direct pay tax policy as an alternative to tax credits could result in more jobs, greater economic activity, and more new projects than would otherwise be the case.
On June 5, BPC hosted a webinar briefing examining direct pay—what it is, and how it can help the clean energy industry. Industry and policy experts joined the conversation to show support for direct pay and discuss this alternative incentive structure.
Hunter Johnston, a partner at Steptoe and Johnston, provided an introduction to the concept of direct pay and a brief legislative history. Direct pay is a tax policy that allows energy property tax credit holders to receive a direct cash payment from the U.S. Treasury, instead of resorting to the tax equity market. Johnston pointed to evidence that direct pay’s ability to avoid the tax equity market is beneficial to the energy sector because it allows more inclusive and efficient distribution of incentives for novel energy projects.
Johnston explained that according to a Congressional Research Service report on tax incentives, allowing taxpayers to treat tax credits as an overpayment of taxes makes direct pay a more efficient incentive. The more margin that is extracted by tax equity, the less money is available for actual project development, but with direct pay, the pool of money for new advanced energy projects is much larger.
Johnston also provided a legislative timeline of direct pay tax policies and proposals over the past decade:
- 2009: The Section 1603 U.S. Treasury Cash Grant Program, a precursor to modern direct pay proposals, was authorized in the American Reinvestment and Recovery Act. The program was met with difficult politics and cumbersome logistics but is regarded as a success in terms of dollars invested and projects deployed. The 1603 program required taxpayers to file a separate application to the Treasury Department that the proposed direct pay mechanism avoids.
- 2010: The term “direct pay” is introduced in the House Ways and Means Committee, in the Domestic Manufacturing and Energy Jobs Act by Rep. Sander Levin (D-MI). The bill did not progress, but the concept was later reprised in the House 2019 GREEN Act proposal.
- 2011: The Section 1603 U.S. Treasury Cash Grant Program expires. A CRS report on tax inventive structures is published arguing that grants are a more efficient form of incentive than tax credits.
- 2019: In May, Reps. Earl Blumenauer (D-OR) and Darin LaHood (R-IL) introduced H.R. 2704, the Renewable Energy Transferability Act, to make renewable energy tax credits transferable, as an alternative to tax equity market structures. In November, House Ways and Means Subcommittee on Select Revenue Measures Chairman Mike Thompson (D-CA) and other Democrats released the House GREEN Act proposal , which includes climate change mitigation related tax provisions. The proposal includes an 85% direct pay provision. In December, Sen. Michael Bennett (D-CO) introduced S. 3032, the Senate companion bill to H.R. 2704.
Johnston’s overview was followed by a panel discussion on direct pay with representatives from the power and clean energy industries:
Erin Duncan | Vice President for Congressional Affairs, Solar Energy Industries Association
John Godfrey | Senior Government Relations Director, American Public Power Association
Paul Gutierrez | Senior Principal Legislative Affairs, National Rural Electric Cooperative Association
Bree Raum | Vice President for Federal Affairs, American Wind Energy Association
Keith Tracy | Principal, Elysian Ventures | Member, Carbon Capture Coalition
Sydney Bopp | Associate Director for Technology Policy, Bipartisan Policy Center’s Energy Project
The panel showed unanimous support for direct pay, but all for their own unique reasons. From the public power perspective, Godfrey expressed how direct pay could help smaller public power utilities. Roughly 2,000 public power utilities serve a total of 49 million Americans, but because they are tax-exempt, programs relying on tax incentives do not help public power utilities. A direct pay option would allow the entire utility sector to benefit, including public power.
From the solar and wind sectors respectively, both Duncan and Raum described how in the face of job losses due to COVID-19, direct pay could help get people back to work and recommence construction at projects that were not completed prior to the emergence of COVID-19.
When asked about his experience with tax incentive programs in the carbon capture industry, Tracy advised policy makers to consider making direct pay a long-term option. The carbon capture industry is in a different stage of maturity compared to the solar and wind industries; Tracy suggested this may be in part because carbon capture was left out of the 2009 Section 1603 U.S. Treasury Grant Program under the American Reinvestment and Recovery Act. A longer-term direct pay policy would allow the full value of the recently reformed federal Section 45Q tax credit to be utilized by the carbon capture industry.
Speaking for electric cooperatives, Gutierrez added to the conversation by noting that since most cooperatives are tax exempt, introducing direct pay would allow co-op members to receive some of this funding, and in turn lower costs for members. Any excess revenue would be returned to member owners in the form of capital credits, either cash or a payment on their bill. Passing the benefits of these lower costs through to members would have a significant impact, since co-ops have 42 million member owners and serve 92% of the persistent poverty counties in the United States. A key benefit of direct pay is that it broadens the types of stakeholders that can receive government funding, such as electric cooperatives.
The perspectives provided by the panelists demonstrated the potential benefits of a direct pay policy for a variety of industries across the U.S. energy sector including economic growth, job creation, strengthened global competitiveness and support for technology innovation.
You can find BPC’s full list of near-term stimulus and recovery proposals for clean energy here.
1 Please note that cooperatives are owned by their members, so “member” and “member owner” are interchangeable.