Tax reform has been a hot topic as of late, particularly for the energy sector. On September 17, 2014, the Senate Finance Committee continued the focus on energy tax reform by holding a hearing on “Reforming America’s Outdated Energy Tax Code.” The hearing followed a trio of major proposals released this past year to revise the Internal Revenue Code’s energy tax provisions. Last December, former Senate Finance Committee Chairman Max Baucus (D-MT) released a discussion draft proposal to streamline energy tax incentives to make them more predictable and technology-neutral. The proposal consolidates the various tax incentives for clean electricity into a single production tax credit (PTC) or an investment tax credit for all types of power generation facilities that are placed into service after December 31, 2016. In February, House Ways and Means Committee Chairman Dave Camp (R-MI) released a discussion draft of the Tax Reform Act of 2014, which sets forth a broad framework for general tax reform, including the phase out and repeal of many energy-related tax credits such as the PTC. And in March, the President released his fiscal year 2015 budget proposal, which contained energy-related tax provisions such as a permanent extension of the PTC and a provision making the PTC refundable thereby allowing taxpayers without current taxable income to take advantage of the credit. A detailed review and comparison of these three proposals can be found here.
The September hearing on energy tax reform included industry representatives and academic experts as witnesses. At the beginning of the hearing, Committee Chairman Senator Ron Wyden (D-OR) articulated three principles that he views are important in moving energy tax reform forward. First, “the tax code must take the costs and benefits of energy sources into account.” This would include factors “such as efficiency, affordability, pollution, and sustainability.” Second, he advocates replacing “today’s quilt of more than 40 energy tax incentives with a modern, technology-neutral approach.” Third, “the disparity in how the tax code treats energy sources – and the uncertainty it causes – has to end.”
During the course of the hearing, several topics were addressed. A central focus of the hearing centered on achieving “parity” between fossil fuels and renewable fuels through a technology neutral tax structure. The witnesses debated over various ways to achieve such parity, including the proposal to eliminate expensing for drilling intangible costs. Other topics addressed by the witness panel included how to encourage technology advancements in the transmission and storage of energy, allowing renewable energy production to be financed through master limited partnerships, and the carbon tax.
At the end of the hearing, Wyden again reiterated his focus for energy tax reform: a technology-neutral approach focused on performance not fuel type. Although it is unlikely that any broad tax reform will be accomplished in the near future, it appears that there is continued interest in structuring the energy tax provisions in a way that is technology neutral and that achieves parity between fossil and renewable fuels.