As a broad tax reform package nears a final vote in Congress, a bicameral conference committee agreed to preserve existing tax credits for wind and solar energy. But a proposed tax for multinational companies could still limit renewable energy investment, industry experts say.
Conferees from the U.S. Senate and House of Representatives released a final tax reform report late on Dec. 15 that reconciled the chambers' respective tax bills. The report proposed lowering the corporate tax rate to 21%, slightly higher than the 20% rate included in both the Senate and House's tax bills but well below the existing rate of 35%. Both the House and Senate will vote on the measure the week of Dec. 18. Republicans will likely have enough votes to pass the legislation after GOP holdouts in the Senate said they would back the conference report.
The conference committee excluded changes previously proposed by the House for the federal wind production tax credit that could have sharply curtailed development. The House proposal would have reduced the credit's value and toughened eligibility requirements by removing a safe harbor provision on when construction begins, but the Dec. 15 report preserves the wind tax credit in its current form.
The committee also agreed to maintain the existing solar energy investment tax credit for commercial developers and homeowners. The commercial solar credit is set to phase down gradually to 10% in 2022 and remain at that level thereafter. As part of its tax bill, the House sought to end the 10% ITC after 2027.
The conference committee also protected a $7,500 tax credit for electric vehicles that the House had proposed to cancel.
Pitfalls for renewables
The base erosion and anti-abuse tax, or BEAT, is intended to raise tax revenues from multinational companies and banks by including more of their cross-border payments to foreign affiliates in their taxable income. Under the committee report, the tax would apply to companies whose worldwide gross receipts total at least $500 million per year and whose cross-border payments represent at least 2% of total deductions.
The Senate bill originally proposed applying the BEAT to companies whose cross-border payments made up 4% or more of deductions, meaning "more banks are being pulled into BEAT" under the conference report, said Keith Martin, a partner with law firm Norton Rose Fulbright. Based on the formula included in the conference report, the more value in tax credits a company holds, the more they could potentially pay under the BEAT.
The conference committee changed the Senate's proposal to allow wind and solar credits to offset up to 80% of a company's BEAT obligations. But after 2025, only research and development credits can be used to offset BEAT liabilities, a shift that could discourage large banks from investing in renewable projects.
"This is an immediate concern for recently completed wind projects, which receive production tax credits for ten years from the date they are placed in service," said Greg Wetstone, president and CEO of the American Council on Renewable Energy, or ACORE. "New wind projects have the option of select[ing] a single year investment tax credit, but that too will involve a loss in value."
Investment tax credits, including for solar, will be less affected because their value is realized closer to when a project is placed in service, rather than as it produces power. Overall, though, Martin and ACORE said the conference committee report was much better than the House and Senate proposals for renewable energy.
"It is slightly negative but ... this is not terrible," Martin told S&P Global Market Intelligence.
The conference report did not include tax credit extensions for new nuclear power plants and "orphan" energy technologies such as qualifying microturbines, fuel cells, geothermal heat pumps and fiber-optic solar properties that were eliminated from the 2015 deal in Congress that extended credits for large-scale commercial wind and solar facilities.
