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The Impact of Three Tax-Reform Proposals on the Financial Performance of Energy Plants

The federal tax code, significantly affects the economics of the energy sector, in addition to the broader U.S. economy. According to the Congressional Research Service, tax expenditures?that is, subsidies that reduce the amount of tax owed to the government? for energy accounted for roughly $22 billion in FY 2013 and are estimated to average roughly $16 billion per year through FY 2017 if present trends continue, equivalent to 1 to 2 percent of existing U.S. tax expenditures. These energy-related tax expenditures fall generally into three categories:

  • Credits and deductions: the modification of tax liability, either indirectly through reducing taxable income (i.e., deductions) or directly reducing tax payments (i.e., credits);
  • Cost-recovery mechanisms: the rules for allocating the business expense associated with an asset over the asset’s life; such depreciation (for tangible assets) or amortization (for intangible assets) expenses are then deducted from revenue to calculate a business’s taxable income; and
  • Alternative business structures: the rules for eligibility and taxation associated with different types of business entities?particularly whether a business entity is subject to corporate income taxation or whether its income is “passed-through” to business owners and subject to individual income taxation.

Most existing energy tax expenditures have been enacted since 1986, when Congress last passed comprehensive tax-reform legislation. All energy sources are directly affected by some part of the tax code, either by provisions specific to a resource, such as the renewable energy production tax credit and the percentage depletion allowance for oil and gas, or by general measures, such as corporate income-tax rates and depreciation rules.

In theory, taxes and subsidies are intended either to correct an energy market failure, to correct a distortion introduced by other policies, or to achieve a greater national objective. In practice, U.S. energy tax policy is a product of fiscal objectives and the interests of policymakers, experts, and interest groups. As a result, enacted tax policy embodies compromises between economic and political goals at a particular point in time. As time passes, the policies embodying previous compromises may reach (or prove unable to reach) their goals and can become increasingly dissonant with new economic realities and political goals. (For this and other reasons, in 2013, BPC’s Strategic Energy Policy Initiative called for Congress to review all existing tax expenditures associated with energy.)

In recent years, several members of Congress have proposed comprehensive tax reform. In February 2014, former House Ways and Means Committee Chairman Rep. Dave Camp (R-MI) released his proposal for comprehensive tax reform. Rep. Camp’s proposal followed a set of proposals issued as part of a staff discussion draft in December 2013 by former Senate Finance Committee Chairman Sen. Max Baucus (D-MT). The previous chairman of the Senate Finance Committee, Sen. Ron Wyden (D-OR), proposed significant changes to the tax code in bipartisan legislation co-sponsored with Sen. Dan Coats (R-IN) in 2011.

All three proposals proceed from the premised goal of lowering individual and corporate income-tax rates while broadening the base of taxable activities, generally by removing or limiting deductions, credits, and techniques for recognizing income in low-tax jurisdictions. While supporting documents for each of these proposals make reasoned arguments for changing various tax provisions, they do not attempt to quantify the impact of those changes on energy project economics. Recent studies from the Congressional Research Service and Lawrence Berkeley National Laboratory quantify the impact of changes to the production tax credit and investment tax credit on wind and solar project economics; however, these studies do not model the full impact of the Baucus, Camp, or Wyden-Coats proposals.

The purpose of this study, then, is to quantify the impact of the Baucus, Camp, and Wyden-Coats proposals on the project economics of different electricity-generation types. AEIC uses a financial model developed by Climate Policy Initiative that estimates the financial performance of electric-generating facilities to set up an equivalent comparison of the impact of the three tax-reform proposals on three illustrative facilities: a wind-power project, a solar-power project, and a gas-fired power plant.

The American Energy Innovation Council (AEIC) is a group of corporate leaders who came together in 2010 as a result of a common concern over America’s insufficient commitment to energy innovation. We speak as executives with broad-based success in innovation, who, in the course of our careers, have been called upon to overcome 
obstacles, seize opportunities, and make difficult decisions, all in the pursuit of building great American companies. We seek to share that experience as it relates to meeting the clean energy challenge.

AEIC is a project of the Bipartisan Policy Center.

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