Dive Brief

• Congressional Republicans on Friday released the text of a tax proposal that includes incentives for electric vehicles and wind power, as well as a fix to the so-called BEAT provision critical to renewable energy. Nuclear tax credits, however, were excluded from the bill.
• The Senate’s version of the tax bill included a Base Erosion Anti-Abuse Tax (BEAT) provision that wind and solar companies said could prevent them from monetizing tax credits. Energy companies will now be able to offset 80% of that tax, and lawmakers also eliminated a corporate alternative minimum tax (AMT) energy interests said could stifle research and development spending.
• Republicans aim to pass the legislation, a combination of bills passed by the House and Senate, by a Dec. 22 deadline to fund the federal government. GOP leaders have indicated other energy incentives could be included in a separate tax extenders package early next year.

Dive Insight

After weeks of closed-door negotiations, Republicans in Congress have reconciled two competing versions of tax legislation.

The House version, passed last month, sparked concern in renewable energy circles with provisions to cut the wind production tax credit and a $7,500 federal tax incentive for electric vehicles.

The Senate version was expected to be friendlier to renewable energy, but the sector was startled by the last-minute inclusion of the BEAT provision, added on Thanksgiving eve shortly before the bill passed.

The BEAT provision targets “earnings stripping" — cross border payments multinational companies make to overseas affiliates to reduce their tax bills. The provision aims to close that loophole by setting a minimum tax on corporate income.

Originally, the provision required every company to quantify 10% of their taxable income, including cross-border payments and, in a second calculation, quantify their tax liability. If the tax liability is less than the taxable income calculation, the government would collect the difference as a tax.

Under that text, wind and solar tax credits could reduce a corporation's tax liability, increasing their tax bills. Renewable energy groups said that could push banks out of the tax equity market, stifling as much as $12 billion in financing.

The final bill aims to avoid that by allowing companies to offset up to 80% of BEAT tax payments accrued due to energy tax credits.

“It’s a high enough percentage to keep the credits, but not too high to have people pay zero taxes,” Sen. Rob Portman (R-OH) told Bloomberg on Friday.

The renewable energy industry was relieved by the changes on Friday, but still harbored some concerns about the impact of BEAT. 

"[W]e are uncertain how the marketplace will react to the fact that more multinational firms may now be covered by the BEAT, and tax credits may not all be useable in any given year," Gregory Wetstone, president and CEO of the American Council on Renewable Energy (ACORE), said in an emailed statement. 

Under the current text, the 80% offset provision for BEAT expires in 2025. That could stifle investment in wind generation, Wetstone added, as those projects receive tax credits for producing power for a decade after they are put in service. 

"New wind projects have the option of selected a single year investment tax credit," he said via email, "but that too will involve a loss in value."

The final compromise bill excludes nuclear tax credits that featured in the House bill but were left out of the Senate legislation. Utility Southern Co. has said those incentives are critical to complete the expansion of the Vogtle nuclear project, which Georgia regulators will decide whether or not to cancel on Dec. 21.

A host of other tax credits for resources like fuel cells, geothermal power, microturbines, and combined heat and power plants were left out of the final bill. These “orphan” resources, also excluded from a wind and solar incentive deal in 2015, could be passed in a separate extenders bill early next year, said Sen. Lisa Murkowski (R-AK) this week.

"What I have received is an indication of a very clear desire to resolve the extenders," she said.

While the tax reform push presented threats to renewables and nuclear interests, electric utilities supported the effort from the start. The push for lower corporate rates could benefit utilities in three ways, said Travis Kavulla, vice chairman of the Montana Public Service Commission.

A lower tax rate will “create headroom” in existing utility rate structures, he said. Utilities currently set rates for customers factoring in a 35% corporate rate. Cutting that to 21%, as the bill proposes, could create a “rare opportunity,” Kavulla said, “where rates could remain the same even while plowing more capital into infrastructure.”

The pending legislation would also allow companies to deduct 100% of the cost of a capital project from their taxes in the first year, rather than deducting smaller amounts over time. That would create a “front-loaded incentive,” Kavulla said, “to plow money into infrastructure early.”

Today, utility rates are set on the assumption that companies will pay a 35% tax rate, but various deductions allow utilities to pay less upfront, allowing utilities to realize “early-year cash benefits even if it means liability in later years.”

Under current law, those future liabilities are based on a 35% corporate tax rate, but lowering that rate would mean utilities would have to pay less than they planned. That difference is owed to customers but could be used to offset infrastructure costs.

“Basically, Uncle Sam and customers have been fronting [utilities] extra cash for infrastructure in the early years,” Kavulla said. “That bill eventually becomes due, but because you’re changing the tax rate midstream, what’s due to customers [in refunds or infrastructure spending] has actually increased.”

Critics of the tax bill argue corporations are likely to return funds to shareholders, rather than making direct investments. While that “may be the case in the wider economy,” Kavulla said, “regulators, if they’re paying any attention at all, are not going to allow that.

“If commissions are not on top of that it could result in limited situations of utilities just pocketing that money, so regulators and consumer advocates are going to have to be pretty proactive,” he said.

This post has been updated to include input from ACORE.