Recent Legislative Proposals Could Drastically Change US Energy Taxation

Mayer Brown - Tax Equity Times

Over the past number of weeks, a variety of legislative proposals, from both sides of the aisle, have been released that, if enacted, could drastically impact the US energy industry and, in many cases, the taxation of energy in the United States. These proposals come on the heels of the Biden administration’s American Jobs Plan and Made in America Tax Plan. Legislative proposals related to energy continue to be released at a rapid pace, and below we highlight certain features from several recent proposals.

Clean Energy for America Act, which was released on April 21, 2021, by Senate Finance Committee Chair Ron Wyden (D-OR) and 24 colleagues, would overhaul the federal energy tax code. The proposal consolidates current energy tax incentives into emissions-based provisions designed to incentivize energy efficiency, clean transportation and clean electricity. The bill, if enacted, would consolidate 40 energy tax incentive provisions into three groups of emissions-based, technology-neutral incentive provisions, eliminate a number of fossil-fuel related provisions and make certain other changes.

  • Incentives for clean electricity – In lieu of the Section 45 production tax credit and the Section 48 investment tax credit, or the various provisions for accelerated depreciation, tax-favored bonds and allocated credits, Wyden’s proposal would create an emissions-based incentive that would apply to clean electricity technologies. Under the proposal, taxpayers would be able to choose between a production tax credit (Section 45U) or an investment tax credit (Section 48D), which would be based, in part, on the carbon emissions of the electricity generated. Any power facility of any technology could qualify for the credits, so long as the facility’s carbon emissions are at or below zero. Further, taxpayers would have the option of receiving the credits as direct refunds. The proposal would also amend, change or otherwise modify a number of other provisions, including, but not limited to, Section 45Q (by eliminating the ability to qualify for the tax credit if the captured carbon oxides are used as a tertiary injectant in an enhanced oil or natural gas project, providing for a direct pay option and making certain other changes).
  • Incentives for clean transportation – Under current law, there are numerous incentives, including some that are temporary or expired, for a variety of alternative fuels and fuel mixtures (including both income and excise tax credits). Wyden’s proposal would create a technology-neutral incentive for the domestic production of clean fuels, with the incentive level dependent upon the lifecycle carbon emissions of a given fuel. New Section 45V would provide a tax credit for the production of clean fuels. Fuels may qualify for the credit if the fuel’s lifecycle emissions are at least 25 percent less than the current US nationwide average. Zero and net-negative emission fuels may qualify for the maximum incentive of $1.00 per gallon (with qualifying production restricted to production in the US of fuel that is used or sold). Further, qualifying fuels must become increasingly cleaner through 2030 to qualify for the credit. Additionally, the proposal provides for additional incentives for electric transportation options.
  • Incentives for energy efficiency – The proposal would reform the current incentive for energy efficient new homes under Section 45L and would enhance the incentive for homeowners to make energy efficient improvements to their current homes under Section 25C. Further, the proposal would extend and improve Section 179D related to the energy efficient commercial buildings deduction.
  • Clean energy bonds – The proposal would include a new Section 54, which would allow a tax credit to holders of bonds used to finance facilities producing clean electricity or clean transportation fuels. As with the other proposals, qualification would be based on operating in cleaner, more efficient ways. The bonds would be available for clean electricity or fuel facilities that would qualify under the electricity or transportation fuel credits.
  • Repeal tax incentives related to fossil fuels – The proposal would repeal a number of provisions related to the fossil fuel industry. Specifically, Wyden’s bill would (a) terminate Section 167(h) related to geological and geophysical expenses; (b) repeal the Section 193 deduction for tertiary injectants; (c) eliminate the ability for certain taxpayers to immediately deduct intangible drilling and development costs under Section 263(c) for certain oil and gas wells; (d) eliminate percentage depletion (under both Section 613 and Section 613A) for oil and gas wells, coal, lignite and oil shale; (e) eliminate capital gains treatment for royalties from coal under Section 631(c); (f) eliminate the Section 43 enhanced oil recovery credit; (g) eliminate the Section 45I credit for producing oil and gas from marginal wells; (h) eliminate the Section 48A qualifying advanced coal project credit; (i) eliminate the Section 48B qualifying gasification project credit; (j) reinstate the treatment of foreign base company oil related income as foreign base company income under Section 954; (k) include foreign oil and gas extraction income in tested income for purposes of determining global intangible low-taxed income under Section 951A; (l) modify Section 7704(d)(1) to eliminate the ability for certain oil, gas or coal activities to fall within the publicly traded partnership rules; and (m) make certain other conforming changes.
  • Workforce development – The proposal also includes provisions requiring many of the projects receiving tax credits to comply with federal labor requirements, including Davis-Bacon Act prevailing wage and qualified apprentice requirements. Projects seeking to qualify for the credits described above would generally need to use a minimum proportion of qualified apprentice work.

End Polluter Welfare Act of 2021 (S. 1167), which was released on April 15, 2021, by Sen. Bernie Sanders (I-VT), is aimed at eliminating certain hydrocarbon-related tax provisions. Specifically, the proposal would (in part) –

  • Increase onshore Federal royalty rates to 18.75 percent for oil and gas production (to achieve parity with the offshore royalty rates), as well as other royalty-related modifications and changes;
  • Eliminate Department of Energy research and development programs for the fossil fuel industry and eliminate government-backed loan guarantees and certain support provisions for fossil-fuel related projects;
  • Terminate a variety of oil and gas and mining-related tax provisions, including, but not limited to, (a) the Section 43 enhanced oil recovery tax credit, (b) the Section 45I tax credit for producing oil and natural gas from marginal wells, (c) Section 461(i)(2) related to certain expenses related to oil and gas wells, (d) Section 469(c)(3) related to directly held working interests in oil and natural gas properties and the ability to use losses from fossil fuel investments to offset other income, (e) Section 613A percentage depletion for oil or natural gas wells, (f) Section 468 related to mine reclamation and closing costs, (g) Section 48A related to the qualifying advanced coal project credit, (h) Section 48B related to the qualifying gasification project credit and (i) a number of other provisions;
  • Remove the eligibility for fossil fuel property or activities to receive (a) the 100 percent bonus depreciation with respect to fossil fuel property, (b) the 20-percent Section 199A deduction on flow-through income, (c) the reduction for foreign derived intangible income or (d) like kind exchange treatment under Section 1031;
  • Extend the deduction for certain geological and geophysical expenditures to seven years (from two years);
  • Treat natural gas gathering lines as 15-year property (instead of seven-year property) for depreciation purposes;
  • Terminate the last-in, first-out method of inventory for oil, natural gas and coal companies;
  • Repeal Section 613 percentage depletion for coal, lignite and oil shale;
  • Eliminate the Section 631(c) capital gain treatment for certain sales of coal or lignite;
  • Impose a tax on crude oil and natural gas produced from the outer Continental Shelf in the Gulf of Mexico;
  • Repeal flow-through treatment for certain publicly traded partnerships under Section 7704 with qualifying income from activities relating to fossil fuels;
  • Eliminate the immediate expensing of either mining exploration expenditures under Section 617 or development expenditures under Section 616 and require such expenditures to be amortized over a seven-year period;
  • Eliminate the immediate expensing of intangible drilling and development costs of oil and gas wells and geothermal wells under Section 263(c) and require those expenses be amortized over a seven-year period;
  • Terminate the Section 45Q tax credit for carbon oxide sequestration; and
  • Amend, repeal or change a variety of international, fossil-fuel related provisions, among other changes.

Growing Renewable Energy and Efficiency Now Act of 2021, or the “Green Act of 2021” (H.R. 848), introduced on February 4, 2021, by Rep. Mike Thompson (D-CA), is touted as being a comprehensive use of the tax code to combat the threat of climate change by expanding the use of renewable energy to help reduce greenhouse gas emissions. In particular, the proposal includes, but is not limited to, the following:

  • Extension of credit for electricity produced from certain renewable resources (Sections 45 and 48(a)(5)). The provision would extend the production tax credit (in most cases) for facilities for which construction begins by the end of 2026.
  • Extension and modification of the Section 48 energy tax credit. The provision would extend the investment tax credit (in most cases) at full value for property for which construction begins by the end of 2026.
  • Extension of the Section 45Q tax credit for carbon oxide sequestration. The provision would extend the Section 45Q tax credit for carbon oxide sequestration facilities that begin construction before the end of 2026.
  • Elective payment for energy property and electricity produced from certain renewable resources, etc. (Section 6431). The provision would allow taxpayers to elect to be treated as having made a payment of tax equal to 85 percent of the value of the credit they would otherwise be eligible for under the investment tax credit, production tax credit or the Section 45Q credit for carbon capture and sequestration.
  • Green publicly traded partnerships under Section 7704. The provision would expand the definition of qualified income for publicly traded partnerships from certain income derived from minerals and natural resources to include income derived from green and renewable energy. The additions would include income from certain activities related to energy production eligible for the production tax credit, property eligible for the investment tax credit, renewable fuels, and energy and fuel from certain carbon sequestration or gasification projects eligible for credits under Sections 48B or 45Q.
  • Extension of the income and excise tax credits for biodiesel and renewable diesel under Sections 40A, 6426 and 6427.
  • Extension of excise tax credits relating to alternative fuels under Sections 6426 and 6427.
  • Extension of the second generation biofuel incentives under Section 40.
  • Extension, increase and modifications of the Section 25C nonbusiness energy property credit.
  • Section 25D residential energy efficient property. The provision would extend the credit for the cost of qualified residential energy efficient property expenditures, including solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pumps.
  • Update and revise the Section 179D energy efficient commercial buildings deduction.
  • Extension, increase and modifications of the Section 45L new energy efficient home credit.
  • Modification of the Section 136 income exclusion for conservation subsidies.
  • Modification of limitations on new qualified plug-in electric drive motor vehicle credit under Section 30D.
  • Credit for previously-owned qualified plug-in electric drive motor vehicles under Section 25E. The provision would create a new refundable credit for buyers of used plug-in electric cars from date of enactment through 2026.
  • Credit for zero-emission heavy vehicles and zero-emission buses under Section 45T. This provision would create a manufacturer credit for the sale of zero-emission heavy vehicles starting after the date of enactment through the end of 2026.
  • Extension of the Section 30B credit for the purchase of a qualified fuel cell motor vehicle through 2026.
  • Extension of the Section 30C alternative fuel refueling property credit.
  • Modification of employer-provided fringe for bicycle commuting under Section 132.
  • Extension of the Section 48C advanced energy project credit.
  • Labor costs of installing mechanical insulation property under Section 45U. The provision would provide a credit for up to 10 percent of the labor costs incurred by a taxpayer in installing mechanical insulation property into a mechanical system which was originally placed in service not less than one year before the date on which such mechanical insulation property is installed.
  • Labor standards for certain energy jobs. The provision creates a certification by the Secretary of Labor for certain labor requirements for green energy and energy-related construction projects.
  • Qualified environmental justice program credit (Section 36C). The provision would create a capped refundable competitive credit of $1 billion for each year from 2022 through and including 2026 to institutions of higher education for environmental justice programs.
  • Report on Greenhouse Gas Reporting Program. The provision requires the Secretary of the Treasury to assess and report on the utility of the data from the Environmental Protection Agency’s Greenhouse Gas Reporting Program for determining the amount of greenhouse gases emitted by each taxpayer for the purpose of imposing a fee on such taxpayers with respect to such emissions.

H.R. 2633, introduced on April 14, 2021, by Rep. David Schweikert (R-AZ), focuses on expanding certain provisions of Section 45Q. In particular, the proposal would increase the Section 45Q tax credit to (a) $85 (from $50) per metric ton of carbon oxides captured and sequestered in secure geological storage and (b) $50 (from $35) per metric ton of carbon oxides captured and either used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project (and then sequestered) or utilized in a qualified manner. The proposal would also drastically reduce the emission thresholds for a facility to be deemed a “qualified facility” for purposes of the tax credit. Finally, the proposal would extend the tax credit period from 12 years to 20 years. If enacted, the proposal would apply to taxable years beginning after December 31, 2020.

American Critical Mineral Independence Act (H.R. 2637), which was released on April 15, 2021, by Rep. Mike Waltz (R-FL), is aimed at ramping up the domestic production of minerals that are essential to batteries, turbines, solar panels and chips. While premised on enhancing national security, the proposal focuses on supporting significant research and development activities to drive innovation in domestic critical minerals production, promoting responsible development of critical minerals and encouraging collaboration to limit supply disruption. The proposal, which would speed up the permitting process and advance research efforts, would apply to exploration projects, as well as from production from both host minerals and tailings.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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