Earlier this month, the US Treasury released a report titled “The Made in America Tax Plan.” The report is not draft legislation with specific proposed revisions to the IRC, but instead a more general report making the case for President Biden’s proposed tax plan (the “Plan”).
A major theme running throughout the document is “replacing subsidies for fossil fuels with incentives for clean energy production.” The Plan seeks to eliminate $35 billion in fossil fuel subsidies over the next decade, while funneling more benefits to the renewable energy sector in the form of “a ten-year extension of the production tax credit and investment tax credit for clean energy generation and storage, and making those credits direct pay.”
Based on Blue Rock’s internal forecasts, a 10-year extension of the solar energy tax credit would support the development of over $300 billion in new solar energy projects over the next decade, with the market generating approximately $12 billion in solar energy tax credits per year. Making the credits direct pay would enable companies with insufficient tax capacity to be able to monetize the tax credit. Or at least that is the intention of the direct pay idea, but there are other proposed changes within the report that may create some complications.
In another section of the Plan, Treasury makes the case for a 15% minimum tax on book income for companies with greater than $2 billion in annual income. Besides granting new taxing authority to the Financial Accounting Standards Board (an un-elected private organization), the 15% minimum tax raises a number of questions for companies considering investing in solar. The biggest question is – will the energy credits offset the 15% book minimum tax?
The report tries to clarify this point, by saying “Firms would be given credit for taxes paid above the minimum book tax threshold in prior years, for general business tax credits (including R&D, clean energy and housing tax credits), and for foreign tax credits.” Although this sentence is structured rather ambiguously, it appears the renewable energy credits will be eligible to offset the minimum tax.
This interpretation would be consistent with the broader underlying theme within the Plan, which is to support clean energy production. However, we should also assume that the depreciation allocated to an owner of a solar energy project will not be eligible to reduce the minimum tax, which will prompt tax credit investors to prefer extended depreciation schedules for the solar property if it appears the depreciation would reduce their tax expense below 15% of their book income. And herein rests perhaps another issue that extends beyond the renewable industry – how would a 15% book minimum tax change investment planning for businesses that were otherwise previously incentivized to make investments in capital intensive assets?
According to a 2018 report jointly sponsored by the Brookings Institute and the Yale School of Management titled “The Fiscal Response to the Great Recession: Steps Taken, Paths Rejected, and Lessons for Next Time,” accelerated depreciation within the American Recovery and Reinvestment Act was “especially potent and the present value cost to the government was especially low given modest federal borrowing rates.” If evidence suggests accelerated depreciation had a stronger than anticipated effect of stimulating economic activity in our last fiscal crisis, it would be reasonable to infer implementing a new taxing regime that erodes the value of accelerated depreciation, which after all is a major reason why book and tax income varies to begin with, will have an outsized drag on the economy compared to issuing more government debt. But that is for the folks in Congress to figure out.