Potential Energy Tax Provisions for an Infrastructure Package
Pivot from COVID Relief to Economic Recovery
When the new administration and Congress were sworn in earlier this year, all attention turned to passing a COVID relief bill as the first order of business. Although President Joe Biden has long sought to reach across the aisle and initial announcements emphasized bipartisanship, there was a quick pivot to reconciliation after eight Republican Senators – two shy of what would be required for a bill’s passage under “regular order” – offered the White House a narrower package. Ultimately, the American Rescue Plan Act of 2021 passed with only Democratic support and was signed into law on March 11.
The administration and Congressional Democrats have already begun turning towards infrastructure and climate legislation, though there is still not consensus about what form a package will take. President Biden kicked off negotiations with a meeting with Senators from both parties and has convened a similar meeting with House Transportation and Infrastructure Committee leaders. There is a sense that bipartisan talks will be much more substantive than they were with the COVID relief bill. Even so, we expect that reconciliation will need to be used for at least some portion of the bill to raise revenue (i.e., to increase the corporate tax rate and top marginal tax rate of wealthy individuals and to provide additional clean energy tax incentives).
Interestingly, several tax increases on high-earners – including eliminating a deduction available to certain publicly traded companies, repealing a provision giving companies more flexibility on accounting for interest-related expenses, and extending a $500,000 cap on the amount of losses that can be claimed by certain pass-through business owners – snuck into the final version of the COVID relief bill. These provisions, among others currently under consideration, will be used to offset of the cost of the infrastructure bill, though it’s unlikely that future increases will receive so little scrutiny. One option that has gained some bipartisan support and also has the advantage of being administratively achievable is a per-mile tax on commercial trucks.
Once revenue-related items have been completed, policy issues related to infrastructure and climate, such as a clean energy standard (CES), could be worked out through “regular order.” Alternatively, Democrats may seek to push everything through reconciliation, so that Republicans cannot claim the political victory of voting against tax increases, while voting for new bridges and new roads.
Potential Energy Tax Provisions for the Infrastructure Bill
As momentum builds for a climate-oriented infrastructure bill, we thought it would be helpful to compile a list of some energy-related tax items that could be included. Already, the entirety of the Democratic membership of the House Ways and Means Committee co-sponsored and introduced the Growing Renewable Energy and Efficiency Now (GREEN) Act (a section-by-section summary is available here), which:
Builds on current successful tax incentives that promote the deployment of green energy technologies, while providing new incentives for activities that reduce greenhouse gas emissions;
Encourages residential investments in green energy and energy efficiency;
Expands incentives for energy efficiency and conservation in homes and buildings, with updated standards;
Supports widespread adoption of zero-emission cars, vans, and buses through tax credits for purchasing vehicles, and supporting deployment of publicly accessible electric vehicle charging infrastructure;
Invests in the green workforce by providing tax credits for advanced manufacturing facilities and mechanical insulation installations;
Advances environmental justice using tax credits for research and other academic programs; and
Prices greenhouse gas emissions.
Although a companion bill to the GREEN Act has not been introduced in the Senate, there is plenty of activity taking place in the upper chamber, with the wide-ranging Clean Energy for America Act and the narrower American Jobs in Energy Manufacturing Act of 2021 serving as a pair of prominent examples. The former consolidates existing energy tax provisions into three technology-neutral buckets addressing electricity, transportation, and efficiency, while the latter expands the advanced energy manufacturing (48C) tax credit. We have also heard rumors of additional tax and policy measures, which are outlined below.
Narrow
Carbon Capture Tax Credit: The development and deployment of carbon capture technology enjoys bipartisan support, and there are a number of associated tax credits: 48A (advanced coal projects), 48B (gasification), and 45Q (sequestration). These credits could either be extended, or a new credit could be created in the form of an ITC for the purchase of carbon capture equipment.
Transmission Investment Tax Credit (ITC): During the last Congress, Sen. Martin Heinrich (D-NM) introduced the Electric Power Infrastructure Improvement Act, which allows a tax credit for investment in a qualifying electric power transmission line property. The legislation was also introduced in the House by Reps. Steven Horsford (D-NV-04) and Susie Lee (D-NV-03), and would provide an ITC of 15 percent for overhead and 25 percent for underground or submarine transmission projects.
Hydropower ITC: There are groups pushing for an ITC that specifically targets the hydropower industry. One proposal being floated would provide credits for three types of hydropower-related activities: rehabilitation (i.e., making dams safer), retrofit (i.e., making dams more efficient), and removal.
Master Limited Partnerships (MLPs): MLPs have long been used by investors in hydrocarbon-based energy portfolios to gain access to larger and more liquid sources of capital to finance their projects. During the 116th Congress, the bipartisan Financing Our Energy Future Act was introduced to address this issue. The legislation adjusts the tax code so that the definition of “qualified” sources of income required to meet MLP requirements would be expanded to include clean energy resources and infrastructure projects. Passage could help attract private capital to the clean energy sector.
Big Picture
Clean Energy for America Act: Sen. Ron Wyden (D-OR) has indicated he will be re-introducing legislation to consolidate 44 energy incentives into three technology-neutral provisions related to electricity, transportation, and conservation. These incentives would phase out once greenhouse gas (GHG) emissions have been reduced by 50 percent, and the legislation would also repeal tax breaks for fossil fuel.
Carbon Tax/CES: There continue to be conversations about whether to implement an economy-wide carbon tax or a CES. A carbon tax is generally thought of as more politically challenging than a CES, but is more germane via reconciliation, whereas a CES does not have the same political baggage, but may be more difficult to achieve through the reconciliation process. During our conversations, staffers have expressed skepticism about whether a CES can be passed through reconciliation.
Gas Tax: During his nomination hearing, Transportation Secretary Pete Buttigieg suggested that a hike in the gas tax is “not off the table,” though a spokesperson later walked back his statement. A commonly cited replacement to the gas tax is a vehicle miles traveled (VMT) tax, however, there are some questions about how this might be implemented.
Executive
Carbon Border Tax: The European Union (EU) is currently considering imposing a border tax that would reflect the carbon emissions attributed to imported goods. The Biden Administration could pursue a similar avenue through the use of Section 232 tariffs, which do not require Congressional approval. Of course, such a move would be subject to challenge in the courts. However, there is still the question of how the U.S. would institute an international border adjustment while remaining WTO-compliant, given the absence of a federal carbon price.