The Production Tax Credit has been an extremely successful policy. The PTC is a market-driven solution that has rapidly scaled up wind power, making it the leading source of clean energy that will never run out. Providing this tax relief has proven to be a great investment as wind energy:
- Has attracted $75 billion in private investment into our economy over the last five years,
- Supports 50,000 good-paying jobs;
- Fosters economic development in all 50 states, including 550 manufacturing facilities serving the industry;
- Has accounted for 31 percent of all newly installed electric generating capacity, second only to natural gas. In some regions, such as the Pacific Northwest, Plains states and the Midwest, wind energy has provided 60 percent or more of all new electric generating capacity; and,
- On an average annual basis, wind energy produces more than 25 percent of the electricity in two states, 12 percent or more in nine states, and five percent or more in 17 states.
Those are the facts.
The fossil fuel-funded Americans for Prosperity (AFP) ignores the facts in its September 2 Forbes.com commentary about the Production Tax Credit and guidance issued by the IRS clarifying eligibility rules. AFP gets everything wrong. It is wrong on the numbers, wrong on the law and wrong on the economics.
The real numbers from non-partisan experts that work for both Rs and Ds in Congress
First, let me address the numbers. Section 45 of the Internal Revenue Code (IRC) provides a PTC for a variety of sources of electricity, not just wind energy. The Joint Committee on Taxation (JCT), the official non-partisan congressional body that estimates the budget impact of tax-related legislation, estimated in May 2014 (see page 3, section C, line 7) that a one year extension of the PTC (including eligibility based on when a project starts construction) would provide tax relief worth $3.5 billion over 5 years (2014-2019) and $13.3 billion over 10 years (2014-2024) encompassing the impact of all eligible technologies, not just wind energy.
AFP vastly over states the impact of the PTC on the federal budget by wrongly attributing a 10 year number as an annual number. Whether careless or intentional (either should bother Forbes readers), AFP got it wrong.
The JCT also issues a tax expenditures document that estimates the annual impact to the federal budget from various provisions in the tax code. For the PTC, this report includes an estimate of the cost of energy projects newly installed in that year as well as the impact of projects installed in previous years that are still eligible to claim the PTC in that given year for the electricity generated.
While this method yields a higher impact estimate, even this estimate falls far short of the number used by AFP (and, arguably, this is not the relevant estimate to use since it includes projects that are claiming PTCs under the prior placed in service eligibility requirements so doesn’t support the point AFP is trying and failing to make with respect to the start of construction rules).
The latest version of the JCT tax expenditures document (Page 23) shows that the PTC for wind energy provides tax relief worth $13.8 billion over 5 years, not every year as AFP claims. Here is the annual breakdown for the cost of the PTC that is attributable only to wind energy in the JCT tax expenditures report:
2014 $1.1 billion
2015 $2.3 billion
2016 $2.9 billion
2017 $3.3 billion
2018 $3.4 billion
Total: $13.8 billion
For comparison’s sake, the same JCT tax expenditures report (Page 24) estimates the five year cost of oil and gas expensing at $6 billion dollars, percentage depletion allowance for oil and gas at $7.4 billion dollars, amortization of geological and geophysical expenses for oil and gas at $700 million, master-limited partnerships (which are heavily oil and gas and not available to renewable energy) at $5.8 billion and credits for investments in clean coal facilities at $1 billion.
In other words, tax incentives available for fossil fuels total nearly $21 billion over five years.
Even when adding in the $1.4 billion attributed to the 5-year accelerated depreciation available for renewables, the incentives for fossil fuels far outweigh what is available for renewable energy over the same period.
What the law actually says
Turning to the law, Congress approved the American Taxpayer Relief Act on January 1, 2013. Section 407 of that law, as AFP actually acknowledges, changed the eligibility threshold for qualifying for the PTC to when a project starts construction rather than basing it on when a project is placed in service. The Senate Finance Committee explained the rationale for this change by saying it was needed to increase business certainty, something conservative and ostensibly pro-business voices like AFP normally support. Given that even AFP concedes that Congress made this change, what exactly is being done without congressional authorization as alleged by AFP? The answer is nothing.
Congress did not define in the law what it meant in Section 407 when they wrote eligible projects are those “the construction of which begins before January 1, 2014.” Therefore, consistent with Article II, Section 3 of the U.S. Constitution, which directs the president to “take Care that the Laws be faithfully executed,” Congress deferred to the IRS to define what it means to start construction. Since Congress didn’t define it, the IRS had to in order to faithfully execute the law (after all, the IRS can’t administer and enforce the tax code if key terms remain undefined).
In defining what it means to start construction, the IRS relied on past precedent for both options it established to qualify – a physical work standard or a safe harbor based on a percent of project costs paid or incurred by a certain date. For example, the physical work standard for starting construction is based on precedents for bonus depreciation for self-constructed property in Section 168(k) of the Internal Revenue Code, expensing for qualified property used in refining liquid fuels in Section 179C, and with respect to the recovery period for natural gas distribution lines in Section 168(e).
Section 168(k) also provides a precedent for the safe harbor option. In fact, the tax code is so complex, the IRS has regularly offered safe harbors for individuals, partnerships and corporations as a way to simplify compliance (again, something AFP would normally applaud; strange how renewable energy causes AFP to repeatedly abandon otherwise strongly held principles).
So, not only did Congress authorize the IRS to define what it means to start construction, but how the IRS did so has ample precedent from other sections of the tax code and their implementing regulations impacting other business sectors.
Finally, with respect to the law, AFP criticizes the inflation adjustment the IRS applied in April 2013, which raised the value of the PTC slightly. The potential for an annual inflation adjustment, depending on economic factors, was written into the law by Congress years ago (Section 45(b)(2)). So, again, contrary to the claim by AFP, the IRS was not acting on its own in making this adjustment. It was merely implementing the law as approved by Congress.
Why is AFP endorsing a tax increase?
It is also interesting that AFP labels the PTC, which allows taxpayers to keep more of their money, a “giveaway.” In any other context, AFP opposes tax increases on businesses. The PTC seems to be the sole exception where AFP believes raising tax taxes on a business sector is a good idea. Apparently AFP’s concern that tax increases dampen private investment, harm economic growth and cost jobs somehow doesn’t apply to the renewable energy sector as if a principle economic belief is repealed when applied to renewable energy. AFP even says on its website, “Ending these deductions, credits, and exclusions without simultaneously lowering rates would be a tax increase, and AFP would likely oppose such a proposal.” AFP clearly doesn’t apply this steadfast opposition to tax increases to the expiration of the PTC.
Conclusion
The fact remains that the PTC has been a success through:
- Driving $15 billion annually in investment into U.S. communities over the past 5 years;
- Supporting more than 50,000 U.S. jobs last year and up to 80,000 in previous years; and,
- Supporting 550 manufacturing facilities in 44 states supplying the wind energy industry.
The wind energy industry welcomes a discussion about the benefits of the PTC. But, such a discussion is difficult when opponents make allegations totally disconnected from reality and that are so easily proven false.
by Tom Vinson
