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| Fig. 1: Donald Trump, President of the United States. (Source: Wikimedia Commons) |
The Republican United States Congress and President Donald Trump (Fig. 1) believe a tax plan that cuts taxes will improve the economy. [1] Members of the Trump Administration and leaders in Congress, collectively known as the "Big Six," agreed on a tax plan outline. [2] The Big Six is called that because it contains six members: the leaders of the House and Senate, the heads of the tax-writing committees for the House and Senate, and two people from the Trump Administration. [2] One aspect of this outline is that the Corporate Tax is to be reduced from a rate of 35% to 20%. [1] The Senate came to an agreement that their tax plan would reduce tax revenues by $1.5 Trillion over the next decade. [3] In agreement, the House also decided that their tax plan would cost $1.5 Trillion. [4] To not exceed $1.5 Trillion in cost, some tax expenditures may be eliminated. [5] Some such tax provisions that may be axed to stay within this limit may affect US energy.
One indirect effect of the House version of tax reform legislation on US energy is the limiting of "tax equity" due to the cut in the corporate tax rate. [6] With tax equity, deals are made where developers of renewable energy projects sell the tax credits they got for their projects to other corporations, which then use it for themselves. [6] This will become difficult to use for clean-energy developers if corporations have to pay lower taxes in the first place and thus do not have much of a need for tax equity deals anymore. [6] Another aspect of the House version of tax reform legislation is that it reduces the size of the wind energy Production Tax Credit down to 1.5 cents per kilowatt-hour (from the current 2.4 cents). [7] It also makes the requirement for its usage that physical construction must have already begun and that projects must be past their early stages where turbines and equipment are bought. [4] This is despite the fact that this tax credit is temporary and already set to expire in 2020. [8] Bloomberg New Energy Finance has predicted that if the House tax bill is passed, projected development of new wind power through 2020 would drop from 38 to 19 gigawatts. [4] Beyond this, the House plan also repeals the $7,500 tax credit for electric car purchases. [9] The House of Representatives passed its version of tax legislation on November 16. [4]
By contrast, the wind energy Production Tax Credit has Republican supporters in the US Senate, such as Dean Heller of Nevada, for example. [8] As a result, the Senate version of the tax proposal ended up without the cut in the tax credit. [10] The Senate bill ultimately does not repeal the electric car tax credit either. [9] The impact of reduced tax equity on renewable energy would likely also be less immediate since the senate bill does not lower the corporate tax until 2019. [5] Even when the reduced corporate tax rate goes into effect it may not drop to as low as 20% as in the Big Six's tax outline or the House version as some Republican Senators, such as Susan Collins of Maine, are fighting for a 22% rate instead, which would allow for slightly more tax equity for renewable developers to take advantage of. [11] On the other hand, at the same time that the Senate bill is kinder to renewables it is also kinder to fossil fuels due to the fact that it allows oil drilling in the Arctic National Wildlife Refuge. [12] This would increase projected revenues over the next decade by $1.1 Billion from lease sales, making staying within the $1.5 Trillion cost limit slightly easier. [13] According to the US Geological survey this refuge may contain somewhere around 4.3 and 11.8 billion barrels of crude oil that can be acquired. [12]
It seems that one way or another, tax reform legislation is likely to move the US renewable-fossil fuel energy balance in the direction of fossil fuels. Of course, it is impossible to predict what provisions exclusive to one version of the tax plan, such as the reduced wind tax credits in the House or the Arctic National Wildlife Refuge provision in the Senate will end up in the final legislation and it may not even pass at all. However, according to Goldman Sachs, the likelihood of tax reform legislation passing is 80% (up from a prior estimate of 65%) in revised projections released on November 14. [14] In addition, both versions of the tax bill benefit fossil fuels and/or hinder renewables to some extent. Thus, it is likely that there will be a final tax reform bill that will pass and it will move the needle toward fossil fuels.
© Ares Hernandez. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] A. Rappeport, "Republican Tax Plan May Not Be Built to Last," New York Times, 1 Oct 17.
[2] A. Rappeport, "White House and G.O.P. Leaders Reach Deal on Principles of Tax Overhaul," New York Times, 27 Jul 17.
[3] A. Rappeport and T. Kaplan, "Senate Republicans Embrace Plan for $1.5 Trillion Tax Cut," New York Times, 19 Sep, 2017.
[4] B. Jacobs, "House Republicans Pass Major Tax Cut Bill After Trump's Closed-Door Speech," The Guardian, 16 Nov 17.
[5] J. Tankersley, A. Rappeport, and T. Kaplan, "Senate Tax Plan Diverges From House Version, Highlighting Political Pressures," New York Times, 9 Nov 17.
[6] A. Nussbaum, B. Eckhouse, and E. Ockerman, "Fossil-Fuel Friendly Tax Plan Spares Oil, Not Solar or Tesla," Bloomberg, 2 Nov 17.
[7] B. Eckhouse, "GOP's 'Cruel and Unusual' Tax Plan Cuts Wind Forecast in Half," Bloomberg, 3 Nov 17.
[8] A. Natter, "GOP Senators Say Wind Tax Credit Is Safe in Their Tax Overhaul," Bloomberg, 7 Nov 17.
[9] K. Bradsher, "China Craves Electric Cars, While U.S. Flirts With Ending Tax Credit," New York Times, 16 Nov 17.
[10] A. Natter, "Tax Breaks for Oil, Wind, Electric Cars Survive in Senate Bill," Bloomberg, 9 Nov 17.
[11] M. Niquette and Ben Brody, "Collins Says Tax Plan Passed by Senate Committee Needs Work," Bloomberg, 19 Nov 17.
[12] J. A. Dlouhy, "Arctic Refuge Drilling Moves Closer to Reality With Senate Vote," Bloomberg, 15 Nov 17.
[13] T. Gardner, "U.S. Senate Panel Advances Quest For Oil in Arctic Refuge," Reuters, 15 Nov 17.
[14] T. Kaplan and J. Tankersley, "Senate Plans to End Obamacare Mandate in Revised Tax Proposal," New York Times, 14 Nov 17.
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