Obama: renewable energy tax credit reforms

President Obama's proposal to reform the way the U.S. taxes businesses includes making the soon-to-lapse production tax credit (PTC) for generating renewable electricity both permanent and refundable.  If enacted, this proposal would support the renewable energy industry, but could lead to a change the way projects are financed.

Earlier this month, the President and the Department of the Treasury issued a joint report entitled, "The President's Framework for Business Tax Reform" (25-page PDF).  The report presents a plan to reform America’s system of business taxation.  It labels the U.S. tax system "uncompetitive and inefficient", noting that the U.S. has a relatively narrow corporate tax base further reduced by loopholes, tax expenditures, and tax planning, and that the nation has a high statutory tax rate.

The cure proposed in the report is presented as supporting the "competitiveness of American businesses and increasing incentives to invest and hire in the United States by lowering rates, cutting tax expenditures, and reducing complexity, while being fiscally responsible."  It offers five key elements of business tax reform:

• Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America
• Strengthen American manufacturing and innovation
• Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment
• Simplify and cut taxes for America’s small businesses
• Restore fiscal responsibility and not add a dime to the deficit

Each of these elements is treated in some depth in the report.  In the section presenting the President's "Framework for Reform" for the second element, strengthening manufacturing, the report says that the Framework would "[e]xtend, consolidate, and enhance key tax incentives to encourage investment in clean energy":

The President’s Framework would make permanent the tax credit for the production of renewable electricity, in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar. As with the R&E Tax Credit, the United States has to date provided only a temporary production tax credit for renewable electricity generation. This approach has created an uncertain investment climate, undermined the effectiveness of our tax expenditures, and hindered the development of a clean energy sector in the United States. In addition, the structure of renewable production and investment tax credits has required many firms to invest in inefficient tax planning through tax equity structures so that they can benefit even when they do not have tax liability in a given year because of a lack of taxable income. The President’s Framework would address this issue by making the permanent production tax credit refundable. 

Several features of this proposal are worth noting.  First, the production tax credit would become permanent.  To date, the PTC has been enacted, expired, and re-enacted multiple times, although occasionally with breaks in between periods of eligibility.  The PTC soon faces expiration yet again.  Renewable energy developers say that the uncertainty over its future significantly chills interest and development in the renewable sector.  President Obama's plan to make the tax credit permanent would be a positive improvement from their perspective because it represents a longer-term commitment to stable tax treatment.  From the national perspective, this longer-term commitment may spur investment and jobs, although it faces challenge from those who do not believe permanent tax credits should be ever used to support renewable energy, let alone permanently.

Second, the PTC would be refundable.  This roughly means that if you qualify for the credit, you don't need any taxable income to be able to use the credit as an offset against tax liability; when a tax credit is refundable, you can often receive its value in the form of a check from the Treasury.  The non-refundable nature of the PTC and the related investment tax credit (ITC) at present has led to business structures that allow multiple entities to invest in a project while allocating specific tax benefits to those investors capable of using them.  According to the report, the result of the widespread use of these tax equity structures has been investment in inefficient tax planning.  President Obama's plan would eliminate one of the key reasons behind the tax equity structure commonly used today, and could change the scope of developers interested in proposing renewable energy projects.  For example, a developer with low or no U.S. tax liability would be able to reap the tax incentive without partnering with income-rich tax equity investors.  Tax equity structures may still have value even if this proposal passed, but it could lead to a change in the way renewable energy projects are financed.

The President's tax reform plan has yet to be fully reviewed by Congress, and many observers believe it nearly impossible that it would pass as currently conceived.  The renewable energy tax incentives at issue here may or may not be part of a final enacted tax reform plan.  For now, in an election year, this proposal has strengthened the President's alliance with the renewable energy industry, as he has cast himself as their best hope for extended and improved tax credits if reelected.