House Republicans worry at lack of end date in tax credit guidelines
Industry officials and tax experts say those fears are unfounded. But the concerns voiced at a hearing yesterday demonstrate growing skepticism toward the credit, whose fate is closely tied to ongoing negotiations over comprehensive tax reform.
At issue is the production tax credit that was extended through the end of this year as part of a broader tax law enacted in January. The credit was modified to apply to projects where construction begins or sufficient investment is made before Dec. 31, a criterion that mirrors the so-called 1603 green energy grant program established in the American Recovery and Reinvestment Act. However, unlike the 2009 stimulus law, January’s tax deal did not include a firm deadline by which projects have to be completed
Though the modification was enacted with bipartisan support and elicited cheers from renewable energy developers, it also created some confusion within the industry and on Capitol Hill, spurring the IRS to publish guidelines based on the 1603 program to flesh out how the law would be applied. IRS says projects that are complete before 2016 will automatically qualify for the credit, and those that come online after that will be scrutinized on a case-by-case basis to ensure that developers undertook “continuous” activity to complete them.
Republican Reps. James Lankford of Oklahoma and Tim Walberg of Michigan raised concerns about the lack of a firm deadline at a hearing of the House Oversight and Government Reform Subcommittee on Energy Policy, Health Care and Entitlements, which Lankford leads. Both members voted against the January tax bill, which extended most of the tax cuts for individuals enacted under then-President George W. Bush in 2001 and 2003 but ended those for the wealthiest taxpayers.
The PTC provides $23 per megawatt-hour of electricity produced for the first 10 years of a wind farm’s life. It also can support geothermal, biomass and a few other renewable energy sources.
Lankford said his concern was with how the PTC plays into the federal budgeting process. The Joint Committee on Taxation estimated that this year’s extension would mean about $1 billion per year in reduced revenues flowing to the federal government over the next decade. But if a developer were able to work slowly enough to not start claiming the credit for five or 10 years, it could complicate budgeting.
Curtis Wilson, associate chief counsel for pass-throughs and special industries at the IRS, acknowledged that such a situation was possible, if developers stuck to the guidelines’ requirements.
“They could if they still met the beginning of construction and continuous construction; there’s not an end date on that,” he told the committee. But he also noted that the IRS said it would closely examine PTC applications filed after 2016.
Rob Gramlich, senior vice president for public policy at the American Wind Energy Association, told the subcommittee it would not make sense for developers to work slowly in order to maintain PTC eligibility. To qualify for the credit, developers must invest 5 percent of their project’s total cost before Dec. 31 or begin actually building the facility while maintaining a continual schedule of construction activity until it is complete
That means developers would face too much financial risk to not complete projects in the two or so years it typically takes for wind farms to come online, and investors would be unwilling to put capital into projects that would not be completed quickly.
David Burton, a PTC expert at the law firm Akin Gump, agreed that maintaining eligibility would be too “difficult and expensive.” Burton did not testify at the hearing but explained in an interview that the IRS guidance was meant to clarify confusion created by Congress itself in not including a deadline in the law. While indefinite PTC eligibility is “theoretically possible,” Burton said, it would be economically infeasible for almost all companies involved in the wind industry.