Tax Preparation Gets Underway Ahead Of April Deadline

Shifting the United States’ energy sector to cleaner, more energy efficient systems is a long process and one that has been tackled in many ways throughout the years. In December, Senator Max Baucus, outgoing Chairman of the Senate Finance Committee released a staff discussion draft on proposed energy tax reform.

There is a long history of energy tax breaks, and this proposal aims to consolidate a lot of the current piecemeal provisions. The Discussion Draft proposes reducing what is currently 42 provisions covering fossil fuels, renewable fuels and clean electricity, into two comprehensive, performance-based, technology-neutral and long term incentives for the production of clean electricity and clean transportation fuels.

Last week, hosted a discussion to discuss the tax reform proposal.

Much of the discussion centered around what respondents thought the efficacy of this solution was. This ranged from highlighting the need for clear definitions within the reform, to a belief that the structure of the subsidies did not encourage innovation in a way that would allow for sustainable reform, that the subsidies may have unexpected effects on the consumer side of the energy sector, and finally that subsidies did not represent a viable solution at all. For the most part, respondents felt that this proposal was a good step if nothing more than a symbolic move to recognize the need for reform.

Proposed reforms must have clear definitions
Tax reforms must be directed carefully to promote economic growth
Certainly tax reform is one of the best hopes for our economy today, if partisan things and vested interests don’t scuttle it. In fact — the most serious urgent problem we have is to reconcile the conflicting goals of less deficit (at least to the extent provided for in the sequestration legislation) versus recovery from high unemployment and less growth…By cutting back (at least for now) on those which create less jobs, and scaling up (for now) those which create more, one can return to growth without a net cost to deficit.” - Paul Werbos, Director for Energy, Power and Adaptive Systems, National Science Foundation

Must be clear about the definition of “clean”

“These proposed changes are pretty good as long as clean is well-defined and includes hydro and nuclear, which are usually eliminated from clean consideration for no good reason. “ James Conca: Director of the Center for Laboratory Sciences, RJLee Group, Inc

Proposed tax reform lacks mechanism to encourage innovation

Must be careful to avoid punitive measures so as to support innovation

“We would urge the Committee to avoid the point raised in its draft of potentially punitive tax measures to discourage what are deemed as heavily-polluting energy sources. In such a framework, technologies such as CCS might never become commercially viable since the companies that could make the investments to take CCS to its marketable stage would be deprived of the very resources they need to do so. Designing more credits to try and offset this effect or provide for a transition would in turn confound the goal of simplification.” Pete Sepp – Executive Vice President, National tax Payers Union

This proposal does not support innovation in the energy sector

“Ultimately, innovation needs to be a defining characteristic of energy tax reform. Tax incentives can play a critical role in supporting emerging clean energy, but only if done right. One important proposal is the Energy Innovation and Manufacturing Tax Credit (EIMTC) proposed by Will Coleman of OnRamp Capital. The EIMTC would only support next-generation clean energy from demonstration until it reaches commercial production scale, at which point the line of credit would sunset and the technology would have to compete in the marketplace.” – Matthew Stepp, Senior Policy Analyst, Information Technology and Innovation Foundation

Why should we be promoting THESE technologies? 

“staff proposals seem to aim at manipulating energy markets by using tax incentives to stimulate deployment of politically preferred energy innovations. What is glossed over is how such political preferences are going to be defined and administered. They also beg the question: Why are special incentives needed to promote deployment of energy solutions that are commercially competitive and cost-effective? Alternately, if the solutions are not cost-effective or competitive, why should the government be promoting their adoption?A practical strategy for energy innovation must accept the reality, among other things, that public policy will never be stable or reliable. So the aim should be to develop innovations that are as insensitive as possible to the vagaries of public policy. ” - Lewis Perelman, Principal, Perelman Group

 Proposed tax reform does not consider the consumer side of these subsidies

Reform could cause problems for the consumers

“If a broad array of energy production subsidies are to be eliminated, the Congress will need to address the likely hardships that will be associated with rising energy prices… Just because there have been abuses of energy conservation tax credits is not a sufficient reason for the Senate Finance Committee and others to abandon inclusion of some incentives for both homeowners and renters to reduce demand for building energy consumption…If tax policies disregard the benefits of resilient baseload electric generation, our electric grid may endure declining levels of reliability.” - William Harris – Secretary and Member foundation for resilient societies

While helpful proposal is likely to INCREASE energy subsidies overall

“This approach should be helpful in making the subsidies more objective-oriented, consistent across sources, and less subject to political carve-outs to narrow constituencies. However, …. I expect the proposal is also likely to increase overall tax subsidies to energy rather than decrease them… Nuclear power provides a salient example of how the new rules would drive up taxpayer subsidies”.-Doug Koplow Founder, Earth Track, Inc.

Proposed tax reform doesn’t address key aspects of the clean energy economy

Misses two key areas for clean energy economy reform: transportation and energy use in buildings

“When is using the tax code a good idea? Can we actually evaluate if tax expenditures succeed in their purpose? Are they good for the budget?…when we talk of the transition to a clean energy economy there are 2 areas that we should focus public policy on … transportation and ensuring our buildings have enough energy for heating, cooling, lighting and computing power. We need to focus on those two areas because gasoline and electricity produced by burning fossil fuel are the biggest producers of greenhouse gases…A person buying a vehicle that does not meet the CAFÉ standard pays an additional fee … a penalty for bad behavior … not a bonus for good behavior….The other critical area not affected materially by tax code proposals is building efficiency…Building efficiency alone can produce 30% of our 2030 projected needs for electricity.” - Jane Twitmyer Principal, CACW|Watts

The tax proposal does not address issues of energy security

“However, the approach taken by the Senate Finance Committee staff falls short in terms of energy security in our view. In large part, this is because the clean transportation tax credit is only available to fuel producers, and it is unclear how non-traditional transportation fuels, such as electricity, would take advantage of the credit. The draft proposes no mechanisms to incentivize the actual purchase of vehicles powered by alternative fuels like electricity and natural gas, despite the fact that these technologies currently represent the most promising options for sharply reducing U.S. oil dependence over the coming decades…As policymakers reform the tax code and look for ways to strengthen the nation’s energy security in doing so, top consideration should be given to better incentivizing the fuels and technologies most capable of breaking our nation’s dangerous dependence on oil.” – Sam Ori; Executive Vice President, Securing America’s Future Energy

Subsidies are not the solution

We should be taxing the “dirty energy”

“….there are many external costs to dirty energy that need to be taken into account before any incentives are removed on the clean energy side. In addition to the CO2 and criteria pollutants, the coal ash that just polluted a river in North Carolina, the chemical spill in W. Virgina, the fracking pollution, oil pipeline breaks and massive pollution from refining oil all need to be accounted for…  None of these costs are in the price of gasoline or diesel. If we are to be fair, let’s make sure there are some taxes applied to these fuels to gradually pay for these costs.” - Paul Scott, Vice President, Plug In America; President, Electric Vehicle Association of Southern California, Plug In America; SolarCity

We should be taxing externalities and not subsidizing clean alternatives

“Let me quote from Gilbert Metcalf’s paper in the American Economic Review (volume 98 issue 2 May 2008 p. 91) “…. one can subsidize clean alternatives to fossil fuels through production and investment tax credits. This is an inefficient way to correct the externality. …..” … the relevant information would be the cost per ton of CO2 removed relative to the status quo.” -Peter Van Doren Senior Fellow and Editor, Regulation, Cato Institute