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Senate Democrats’ Bill Would Overhaul the Treatment of Energy in the Tax Code

5 min readBy: Scott Greenberg

Earlier this week, Democrats on the Senate Committee on Energy and Natural Resources released the American Energy Innovation Act, a 437-page bill aimed at promoting clean energy and improving the country’s energy infrastructure. About 100 pages of the bill are devoted to rewriting several sections of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code that deal with energy.

Here are a few takeaways about the tax-related portions of the bill:

1. The bill would simplify the treatment of energy in the tax code.

There are currently over two dozen tax provisions relating to energy. The majority of these are incentives and subsidies for consumers and producers of clean energy. The Senate bill would repeal or phase out 16 of these provisions, replacing them with 10 new clean energy credits (listed below.)

Most of the new credits created by the bill are significantly simpler than their predecessors. For instance, the current Production Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. is over 5,000 words long; the new Clean Energy Production Credit described in the bill contains approximately 2,300 words.

2. The new clean energy credits are technology-neutral.

One of the ways in which the Senate bill simplifies the system of clean energy credits is by not making reference to any specific energy technologies. Currently, the tax code defines, in great length, which fuels, home improvements, and power plants qualify for federal energy credits. In contrast, the credits proposed by the Senate bill apply to any technology with low enough carbon emissions.

In theory, this means that if a company discovers an entirely new energy technology, it would be able to receive federal clean energy credits for it immediately. Currently, the company would likely have to lobby Congress to amend the tax code to include the new technology.

3. The bill uses performance-based standards to compute tax credits.

Under current law, different energy sources receive different levels of federal tax subsidies, with little rhyme or reason. For instance, wind power receives a production tax credit twice as large as hydropower.

Instead of designating different subsidy levels for different technologies, the Senate bill applies a simple formula to compute tax credits. Technologies that produce no carbon emissions would receive the maximum credit. The more carbon emissions the technology produces, the smaller a credit it would receive. In this way, the Senate bill provides an equal subsidy for any two technologies with the same emissions level.

4. The bill implicitly sets a price on carbon emissions mitigation.

Under the Senate bill, a power plant with no carbon emissions would receive a credit of 2.3 cents for every kilowatt-hour of energy it produces. A power plant with 372 grams of carbon dioxide-equivalent emissions would no longer be eligible to receive a federal energy credit. This means that the Senate bill essentially pays power producers 2.3 cents for every 372 grams of carbon emissions mitigation. A bit of simple math shows that this is equivalent to $61.82 for every metric ton of carbon emissions mitigation.

$61.82 per metric ton is a relatively high subsidy for carbon emissions mitigation. There is extensive debate among economists about the proper value of carbon mitigation. When making federal regulations, the EPA uses a range of estimations for the value of carbon mitigation, from $12 per metric ton to $62 (as well as a worst-case scenario estimation of $120). So, the Senate Democrats’ figure falls right at the top of the EPA’s range.

5. The bill would continue to subsidize the production of energy.

Currently, nearly every source of energy is subsidized to some extent by the federal government. This means that the U.S. economy is more energy-heavy than it would be under normal market conditions, leading to an inefficient allocation of resources. The Senate Democrats’ bill would continue to heavily subsidize energy production in the United States.

In general, tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. s, such as energy subsidies, leave the federal government with less revenue, requiring higher tax rates overall on individuals and businesses.

6. The bill would discourage investment and jobs in the oil and gas industries.

Under an ideal tax code, businesses would be able to deduct all investment expenses as they occur. In practice, the federal tax code has dozens of depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules for different investments, which require businesses to deduct the costs over several years. The longer businesses are required to deduct the costs of investment, the more harmful for growth and investment.

The Senate Democrats’ bill would force oil and gas companies to spread out the costs of drilling over a longer period of time, harming investment and moving further away from an ideal treatment of capital expenses.

(A postscript: if I were a lawmaker who wanted to encourage clean energy through the tax code, I would allow clean energy companies to fully expense their capital investments. Full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. would prevent companies from being taxed on income that does not yet exist and would encourage investment and growth.)

Summary of Clean Energy Tax Provisions in the American Energy Innovation Act

New Tax Provisions Created

Tax Provisions Repealed or Left to Expire

Clean Energy Production Credit

Nonbusiness Energy Property Credit

Clean Energy Investment Credit

Residential Energy Efficient Property Credit

Clean Residential Energy Credit

Alternative Fuel Vehicle Refueling Property Credit

Additional Qualifying Advanced Energy Credit

New Qualified Plug-In Electric Drive Motor Vehicles Credit

Clean Fuel Production Credit

Production Tax Credit

New Energy Efficient Home Credit

Credit for Production from Advanced Nuclear Facilities

Credit For Energy Efficiency Improvements To Residential Buildings.

New Energy Efficient Home Credit

Energy Efficient Commercial Building Deduction.

Energy Efficient Appliance Credit

Deduction For Energy Efficiency Improvements To Commercial Buildings.

Credit for Carbon Dioxide Sequestration

Clean Energy Bonds Credit

Energy Investment Tax Credit

Energy Efficient Commercial Buildings Deduction

Second Generation Biofuel Producer Credit

Biodiesel and Renewable Diesel Credit

Biodiesel Mixture Credit

Alternative Fuel Credit

Alcohol, Biodiesel, or Alternative Fuel Credit