In releasing his long-awaited tax reform proposal that would cut most incentives for the energy industry, House Ways and Means Chairman Dave Camp was apparently eager to frame them as little more than wasteful giveaways to well-connected industries.Recipients of those deductions were quick to paint the Michigan Republican’s proposal as a dicey endeavor that risked halting the domestic energy renaissance and reversing long-standing policy goals.The oil industry and its defenders on Capitol Hill howled that the Ways and Means chairman’s proposal risked halting the U.S. energy renaissance, despite an apparent concession that left in place the most lucrative deduction specifically targeted to oil and natural gas producers.
Clean energy industries such as wind and solar, efficiency and biofuels did not fare nearly so well, losing out on almost all of their favored credits – and in some cases facing the potential for steep reductions compared to what Congress had previously promised to deliver.
A summary of the proposal released yesterday paints many of the incentives targeted for elimination as unnecessary windfalls that enrich their recipients without benefiting the public at large.
For example, the percentage depletion allowance for oil and gas wells is more lucrative than traditional depreciation rules because “only extractive industries are allowed to recover more than their investment,” the summary says. Another provision in existing law governing deductions of passive losses creates a “special rule” for investors in oil and gas property, so Camp’s proposal “creates parity among all taxpayers by removing this special exception.”
Similar logic is applied to some clean energy incentives, namely the wind energy production tax credit.
“Businesses in the wind industry have represented to the Committee that the industry could survive with a credit worth 60 percent of the current credit, implying that the credit provides a windfall that does not serve the intended policy,” the summary says.
Many of the changes Camp proposed to cost recovery and accounting rules would hit oil and gas companies’ bottom lines along with much of the rest of the economy. Examples include the proposal to repeal the use of modified accelerated cost recovery system (MACRS) and the use of last-in, first-out (LIFO) accounting rules, both of which are prized by oil and gas firms as well as other industries.
The draft also would eliminate several oil-specific incentives, such as the little-used credits for enhanced oil recovery and marginal well production that only apply when oil prices are exceptionally low and the percentage depletion allowance that accounts for the amount of oil or gas extracted from a well but also can provide windfalls in certain instances.
Still, one of the most valuable oil industry incentives survives. Camp did not eliminate the ability to deduct intangible drilling costs, such as worker salaries, apparently responding to the industry’s long-standing argument that the deduction is no different from other allowances for businesses to deduct their costs. That is among the most lucrative industry-specific proposals. The Joint Committee on Taxation said last year that it costs the government about $5.7 billion in lost revenue over five years – nearly twice as much as the percentage depletion allowance.
One conservative lobbyist close to the industry acknowledged that keeping the IDC deduction amounted to a win for the industry, but oil supporters were publicly critical of the proposal.
“While a lot of thought and effort went into Rep. Camp’s proposal, I have serious concerns that repealing these energy tax provisions that have been – and continue to be – so important is counterproductive for job creation and America’s energy security,” said Sen. Mary Landrieu (D-La.), the new chairwoman of the Senate Energy and Natural Resources Committee and an ardent defender of her home state’s oil and gas industry.
Clean energy supporters had almost no silver lining to cling to in the discussion draft. As expected, Camp proposed eliminating nearly every tax credit to support renewables, efficiency and biofuels – many of which expired at the end of last year due to their persistent temporary nature.
For wind developers, the news was even worse. Camp not only said the production tax credit should not be extended but that the credit’s value should be cut for developers still within the 10-year eligibility window in which they can recoup it. So rather than receiving the current $23-per-megawatt-hour credit, they would see its value fall to $15/MWh.
“Retroactive tax increases undermine investors’ trust in the U.S. investment environment,” said Tom Kiernan, CEO of the American Wind Energy Association. “To raise taxes retroactively on an industry that has invested up to $25 billion annually in this country and built 550 manufacturing facilities would be bad policy.”
Solar developers also would lose out on a permanent investment tax credit to cover 10 percent of project costs; however, a current, temporary 30 percent ITC would remain in place until its scheduled expiration in 2016.
“The facts speak for themselves: More solar has been installed nationwide in the last 18 months than in the 30 years prior,” said Ken Johnson, a spokesman for the Solar Energy Industries Association. “Smart public policies like the solar ITC are paying huge dividends for America and should be continued.”
A ‘first step’
Discussion of the Camp proposal was largely an academic one, given the almost nonexistent prospects for comprehensive tax reform to become law this year. Camp, a Michigan Republican, is expected to step down from his post next year because of GOP rules setting term limits for committee chairmen, and many observers suggested the release was as much about having something to show for all the time Camp and his staff have put into the effort as about actually expecting legislation to be enacted.
Still there were some encouraging signs for the proposal, especially in the reaction from Rep. Paul Ryan (R-Wis.), who is widely expected to replace Camp as Ways and Means chairman next year. Ryan offered a strong endorsement for the proposal, indicating that it could provide a starting point for tax reform proposals he is likely to draw up next year.
“No plan is perfect, but the critics must offer an alternative or tell Americans why they continue to defend a nightmarish tax code that works only for the well-connected,” Ryan said. “Chairman Camp’s plan is a terrific first step toward a much-needed debate over how to best reform the tax code.”
Leaders of the Senate Finance Committee also praised Camp’s efforts, although they said they still need to study its specific details.
“We look forward to working with members in both chambers and on both sides of the aisle to move the conversation forward,” Finance Chairman Ron Wyden (D-Ore.) and ranking member Orrin Hatch (R-Utah) said in a joint statement.
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