Infrastructure plan: Outlook in Congress

President Biden unveiled a massive infrastructure plan in late March that includes many provisions of interest to renewable energy developers and the broader project finance market. Four veteran Washington observers talked in early April about the outlook in Congress.

The four are Joe Mikrut, a partner with Capitol Tax Partners and a former Treasury tax legislative counsel under President Clinton and senior legislation counsel on the Joint Committee on Taxation staff, John Gimigliano, head of federal tax legislative and regulatory services for KPMG Global and a former Republican tax counsel to the House Ways and Means Committee, Elissa Levin, director of federal government affairs for Avangrid, Inc., a multi-state utility and owner of one of the largest US wind and solar developers, Avangrid Renewables, and Chris Miller, a partner with AJW Inc. and a former top aide for energy and environment to Harry Reid when Reid was Senate majority leader and a 26-year Capitol Hill veteran. The moderator is Keith Martin with Norton Rose Fulbright in Washington.

Odds

MR. MARTIN: Joe Mikrut, what odds do you give that some version of the Biden infrastructure plan will pass Congress this year?

MR. MIKRUT: I think the odds are fairly high. There is a lot of interest in Congress in doing something. There is even interest on a bipartisan basis, not to predict that the bill will be bipartisan, but both parties have been talking about infrastructure for years, through several administrations, and I think this time something will actually get done.

MR. MARTIN: John Gimigliano, do you agree?

MR. GIMIGLIANO: I do. To put it in tax opinion terms, I would place the odds at "more likely than not," maybe approaching a "should" level. Many things can derail any piece of legislation. That said, I think that Democrats will find a way to pass a significant infrastructure bill this year.

MR. MARTIN: Elissa Levin, what are the odds?

MS. LEVIN: I am really optimistic about the chances of something passing this year. It will not be easy. We have an equally divided Senate and a more closely divided House with the news this morning of the passing of Mr. Hastings. Every member counts, and every member will count equally in the search for votes. Their individual issues with the bill are going to have to be addressed, but there is momentum to get something done.

MR. MARTIN: Chris Miller?

MR. MILLER: I think it will happen, and it is just a question of timing. The Senate parliamentarian's decision yesterday made it close to a sure thing this year.

MR. MARTIN: Let's talk about that. The Democrats barely have control of the House — Pelosi can afford to lose only six votes — and the Senate is split 50-50. Every single Senate Democrat has to vote for the bill unless some Republicans break ranks. John Gimigliano, Mitch McConnell says no Republican will vote for the bill. Is he right?

MR. GIMIGLIANO: If the bill is paid for with significant tax increases, as we expect, then, yes, it will be very hard for Republicans to support it. If we are talking about $1 trillion or more in tax increases, which is what President Biden has laid out, it will probably have to be a Democrat-only product.

MR. MARTIN: Every Democrat will have to vote for it in the Senate for it to pass, which makes it a high-wire act and gives every Democrat leverage in exchange for his or her vote. A bill normally requires 60 votes to clear the Senate because any senator opposed to it can threaten to filibuster, and 60 votes are required to cut off debate. Sixty votes for this are impossible, so the Democrats will have to use one of three budget reconciliation cards they have over the next two years that allow a bill to pass by simple majority. They already used one to pass a $1.9 trillion COVID relief bill in March.

Chris Miller, you mentioned a ruling yesterday by the Senate parliamentarian. Did that ruling say that the Democrats can reuse the one budget reconciliation card they already used, or that they can use two cards in one year?

MR. MILLER: They are the same thing. The ruling was that the Democrats can amend the fiscal year 2021 budget resolution they used to pass the COVID relief bill also to make room for an infrastructure bill. That does change the timing a bit.

MR. MARTIN: How does it change the timing?

MR. MILLER: It would need to be done and cleared before the government's current fiscal year ends on September 30.

MR. MARTIN: If it has not cleared Congress by September 30, what happens?

MR. MILLER: Then they could not replay the card they already used and would have to use budget reconciliation card number two. That is for the fiscal year 2022 budget. The Democratic leadership will have to make a decision which card to play early in the process.

Timing

MR. MARTIN: Joe Mikrut, by when do you expect the infrastructure bill to pass?

MR. MIKRUT: I think they will try to do it by the August recess. The Speaker of the House, Nancy Pelosi, said she wants the bill to have passed the House by July 4. The bill will then be in the Senate for the month of July. Strange things happen to bills that remain in play over the August recess, particularly if they have revenue raisers. The members go home and start hearing from interest groups who chip away at unpopular provisions. That's why they want to act quickly and have this wrapped up before the August recess.

MR. MARTIN: John Gimigliano, same answer?

MR. GIMIGLIANO: Maybe I am a bit of an outlier, but I think this is a Q4 exercise. I think the ruling from the parliamentarian yesterday appears to be more than it actually is.

There are two steps in the infrastructure plan. The American Jobs Plan is step one to be followed later by the American Family Plan, both of which are going to require tax increases to pay for them. There will be a linkage between the two that will make it hard to do one without the other, for both policy and political reasons. I think they will end up being bundled together in one giant reconciliation bill, and the debate will drag into the fall and get done in Q4.

MR. MARTIN: And use the fiscal year 2022 budget card. Elissa Levin, when do you expect the infrastructure bill to pass?

MS. LEVIN: I wish I could agree with Joe that it will be done before the August recess, but I think it will take into September and maybe even October.

MR. MARTIN: Biden is talking about two types of infrastructure: clean energy and basic infrastructure in his first plan, and then a social infrastructure bill, which is what John Gimigliano referred to. Chris Miller, is it your view that the infrastructure bill with clean energy provisions will pass by September 30?

MR. MILLER: I think the House will have acted before the August recess. The Senate moves more slowly and might end up with a great combo package around December 23.

MR. MARTIN: A wit once said that Congress acts only in two situations. One is when there is consensus, which there isn't in this case, and the other is exhaustion, which is your scenario. Chris Miller, what are the implications of having to use a budget reconciliation card to pass the bill?

MR. MILLER: It makes it hard to do anything other than tax and spending provisions. Anything else is subject to a point of order and can be stripped from the bill. In addition, the Byrd rule bars including anything that will add to the deficit after the budget window, which is usually 10 years.

MR. MARTIN: John Gimigliano, the Biden infrastructure plan calls for spending on infrastructure over eight years, but the tax collections to pay for it are spread over 15 years. I guess that does not violate the Byrd rule because the tax collections help to shrink the deficit.

MR. GIMIGLIANO: The hope is that from a budgetary point of view, Congress would see that spending tailing off as we approach the end of the 10-year window, but we would have tax increases that are going to be permanent, at least as Biden outlined them.

MR. MARTIN: One more general question for Joe Mikrut and then we will drill down into details. Do you expect Biden to send legislative language to Congress or is his plan merely a set of broad strokes with Congress left to fill in the details? Put differently, how excited should people be about what they read in the fact sheet the White House released last Wednesday?

MR. MIKRUT: If they like what they read, then they should be excited. We should see more detail coming out, perhaps in mid-May. A new administration generally puts out its first budget in the spring of its first year. We expect that to happen in May. That budget is generally accompanied by a "green book" that the Treasury writes with the details of each of the tax proposals. We will probably not see statutory language, but we will at least have more detail about the tax proposals.

Tax credits

MR. MARTIN: Let me now drill down into details and start with Elissa Levin. There are at least three tax proposals to help renewable energy. One is a tax credit for standalone storage. Another is a direct-pay alternative to tax credits, and the third is a "10-year expansion and extension" of renewable energy tax credits. Rank these in terms of likelihood to be in the final bill.

MS. LEVIN: I think all three will end up in the final bill. That said, we should have a good idea where things are headed when the House Ways and Means Committee marks up the tax provisions in June.

MR. MARTIN: Don't we already know what will be in the House Ways and Means Committee bill? The Democrats on that committee already released their legislative text in February.

MS. LEVIN: We will see how the House Ways and Means Committee takes into consideration what Biden has proposed. There may also have to be some consideration given to the tech-neutral approach that Senator Wyden is expected to offer in the Senate. It will not be an easy task to reconcile the two approaches.

MR. MARTIN: Wyden wants to repeal the 44 current energy-related tax credits and replace them with just three: one for clean energy, one for clean transportation fuels and one for energy efficiency improvements. It sounds like you expect that to be in the Senate bill in place of the current production tax credits and investment tax credits to which we are all accustomed.

MS. LEVIN: The tech-neutral approach has been a top priority for Senator Wyden for a long time, and we as an industry need to figure out the effects on our industry and model them. We expect Wyden to release the draft in the next couple weeks. It is a serious proposal.

MR. MARTIN: One of the biggest issues will be transition rules. How do you transition from the current system into it?

Joe Mikrut, do you agree with Elissa that all three Biden tax proposals – a tax credit for standalone storage, a direct-pay alternative to tax credits, and a "10-year expansion and extension" of renewable energy tax credits — are likely to be in the final bill?

MR. MIKRUT: Yes. The only place I would hesitate is whether the energy credits will be extended for 10 years or a shorter period. We have been talking about storage for a long time. It is ripe for action. There is a lot of momentum behind direct pay.

A tax credit extension raises budget reconciliation issues. If you extend PTCs for 10 years, a significant amount of revenue loss is outside the 10-year budget window. The question is whether the revenue offsets that are also in the bill will be enough to cover it.

MR. MARTIN: The Byrd rule barring anything that increases the deficit after 10 years is applied on a net basis by looking at the entire tax title of the bill, correct?

MR. MIKRUT: Yes, each title individually. You could actually take a tax title and break it up into separate titles, like a green title and a different title, but the more you break it up, the harder it is to make the whole thing balance.

MR. Martin: John Gimigliano, how do you rank the likelihood that the three items will be in the final bill?

MR. GIMIGLIANO: I concur with everybody that all three are likely to be enacted, but with one limitation that is the very harsh rules of budget reconciliation.

I view the Biden plan as an opening bid or wish list. There very well may be enough budgetary headroom in the bill to do all of this, but there also may not be. There is a question of how many votes they have for tax increases to achieve long-term budget neutrality. To the extent they lack the votes, they really only have two choices: one is to scale back the tax-increase provisions in some way, either the duration or the absolute number of them, or the alternative is to fall back on deficit financing for part of the cost. I think the latter is a very real possibility.

MR. MARTIN: Joe Mikrut, what does Biden mean by 10-year extension? Do you have any more details?

MR. MIKRUT: No. I assumed that it was just pushing out the start-of-construction date on the various provisions for 10 years.

MR. MARTIN: Chris Miller, Joe Manchin, whose vote will be critical, said last month at an ACORE conference that he is not in favor of extending renewable energy tax credits. Greg Wetstone talked him down a bit from that. Then he said on a West Virginia radio program on Monday that he thinks the infrastructure bill is in trouble. The infrastructure bill obviously cannot pass without his vote. Is it a reasonable assumption that he will fall into line with the other Democrats?

MR. MILLER: Fall into line will probably be in the eye of the beholder, but I think he will come around to supporting some form of extension of those tax credits. I think he will probably make a case that mature technologies, especially those that have significant market share, no longer need additional incentives. I suspect direct pay will be a problem for him beyond a certain number of years. It remains to be seen how fossil fuels fare in any of this, potentially as a pay-for by repealing their tax incentives. Those will be important things to him as he decides whether to support the whole package.

MR. MARTIN: There will have to be something for fossil fuels or coal for West Virginia.

Labor provisions

MR. MARTIN: The fact sheet that the White House put out suggests that the extra tax credits will come with a catch. Projects claiming them will have to comply with "strong labor standards to ensure the jobs created are good-quality jobs with a free and fair choice to join a union and bargain collectively." Joe Mikrut, what does that mean?

MR. MIKRUT: The House Ways and Means Committee Democrats had a similar provision in the set of GREEN Act tax proposals that they released in early February. Anyone paying qualifying wages would qualify for an extra tax credit. I assume that is similar to what the President is talking about here.

MR. MARTIN: The labor unions have not been pleased about the shift to green energy. They earn more in fossil fuel jobs; those are more unionized. Wind is about 6% labor, and solar is 4%. The GREEN Act that you mentioned requires payment of Davis-Bacon wages, which are the same wages paid on federal construction projects, or else entering into a collective bargaining agreement. I don't think the GREEN Act provision would apply to the renewable energy tax credits. Maybe somebody on the call has a different view. It is also, as you said, Joe, a carrot in the form of an extra 10% investment tax credit.

John Gimigliano, do you expect this in the final bill, and do you expect it to be a stick or a carrot?

MR. GIMIGLIANO: I think that is an open question. The minimum-wage provisions were stripped out on the COVID relief bill in early March in budget reconciliation. Whether this particular provision could survive budget reconciliation turns on whether it is considered to have a direct effect on the federal budget. I don't know the answer to that.

MR. MARTIN: Elissa Levin, do you expect the labor provisions to be in the final bill and, if so, what will they look like?

MS. LEVIN: I don't know whether they are likely to be in it. I can tell you that we certainly favor the carrot approach and are working on this with the tax committees. Richard Neal, the House Ways and Means Committee chairman, said right after the tax extenders passed in December that future extensions of credits would come with labor conditions.

We are taking a close look at this. At least half of our workforce at Avangrid belongs to unions. We are used to operating in a union environment. We work with unions around the country when building projects where it is practical to do so and union labor is available. We are committed to using union labor and working with our local communities going forward. While this is an issue that we will watch and monitor in terms of legislative language, we are generally on board.

Direct pay

MR. MARTIN: Joe Mikrut, how do you expect the direct-pay alternative to work? How quickly will owners of renewable energy projects receive refunds? Will the refunds be for 100% of the credit value?

MR. MIKRUT: We have seen a number of versions of this floated over the last year. Senator Cornyn had a proposal last year to allow refunds of business tax credits claimed in 2019 or 2020 or carried forward into those two years. Senator Carper has also done some work in this area.

All would treat the tax credits as an estimated tax payment and then provide rules as to when that payment is deemed to have been made. I believe the Cornyn bill was as of the due date for the tax return. These are quick-refund processes run through the IRS.

The main difference between the House and the Senate versions relates to the amount. In the House version, if you make the election, you would be refunded 85% of the tax credit value. In the Senate versions, it is 100%. That is something that will have to be worked out as the bill moves forward.

MR. MARTIN: Are the refunds expected to be available only for two years?

MR. MIKRUT: I think the thought is to tie them to projects that are under construction for tax purposes by a deadline that is either two or three years from now. Once elected, the refunds would be available for any credits from that project.

MR. MARTIN: John Gimigliano, the last time we saw this, the refunds were run through the Treasury Department. This time, they would go through the IRS. Are there other differences?

MR. GIMIGLIANO: It is an open question whether a refund program run through the IRS will run more smoothly than the section 1603 program did. Treasury, at the outset, met the 60- or 90-day obligation to make payments, but then rarely met that deadline as the program went on.

There is a longstanding IRS mechanism to issue refunds in the case of tax overpayments. A direct-pay program would put a lot of pressure on the IRS to issue refunds without really having the opportunity to audit the refund requests. You wonder what they will do to ensure that payments are appropriate. The last thing the IRS wants to have to do is to claw back amounts that it paid that were found to have been unwarranted.

I am not as convinced that this is going to run as smoothly as people think because I believe the IRS is going to want to impose some oversight through some form of real-time auditing of applicants.

MR. MARTIN: The good thing about the Treasury cash grant program was the two women who ran it were very efficient. The program was enacted in February 2009, and they had it standing up by July that year. If you had questions, you sent them an email. You sometimes got answers back in writing within as few as three minutes. If you ask the IRS a similar question, it can take months to get an answer. It remains to be seen how smoothly a program run through the IRS will work.

There is also a requirement in current law for any refund over $2 million to be approved by the Joint Tax Committee refund counsel. Joe Mikrut, will that apply here?

MR. MIKRUT: I believe the answer is "yes" the way these proposals are currently drafted. However, that is something that has been turned off in the past in various situations.

Another difference between this new program and the section 1603 program relates to production tax credits. Under the section 1603 program, the PTCs were converted to investment tax credits and then refunded in the form of one-time lump sum payments. That made sense for a program administered through the Treasury, since it had only to cut one check.

The way the bills work for PTCs is you would get refunds as PTCs are claimed over time. If PTCs are more valuable than an ITC for a project, this form of direct pay is a more efficient mechanism than the section 1603 program.

MR. MARTIN: Normally under the current quick-refund procedure in section 6411 of the tax code, you have to wait until the tax return is filed for a year to apply for a refund. Will people have to wait in this case? Anyone? [Pause]

That is a detail to which we will all be paying attention.

Clean energy standard

MR. MARTIN: Chris Miller, Biden wants a federal energy efficiency and clean energy standard. Do you think that will fall victim to budget reconciliation? It is not a tax or spending proposal.

MR. MILLER: This has been a matter of intense discussion behind the scenes for close to a year now. Some advocates have offered as many as three different ways they think the standard could be structured to pass muster under budget reconciliation.

Both the Senate Environment Committee and the Senate Energy Committee have been looking at this, but I have the impression that the Senate Finance Committee is not interested. If the committees can miraculously come to an agreement on something, then maybe it has a chance, but it is a very tall order.

MR. MARTIN: Do you agree with that, Elissa Levin?

MS. LEVIN: I do. I think 100% by 2035 is quite ambitious. That is coming from Avangrid, where we were the first utility in 2016 to set a goal of being carbon neutral by 2035. Not all the utilities are on board yet, and so I think it will be a steep hill to climb.

And that is before considering the difficulty of getting anything like this through reconciliation. The idea that people have offered to make a clean energy standard fit into a budget reconciliation bill are detailed and will require additional screening and consideration. Regardless, I think a federal clean energy standard has incredible potential to deploy clean energy, and it deserves consideration.

Tax increases

MR. MARTIN: John Gimigliano, Republicans took aim over the weekend at the proposed increase in the corporate income tax rate to 28%. Where do you expect the rate ultimately to settle? And when will the new rate take effect?

MR. GIMIGLIANO: I am most confident answering the last question, although not wholly confident. The new rate is most likely to apply to tax years beginning on or after January 1, 2022. Not only do I think the Democrats do not want to do retroactive tax increases, I am also not sure they have the votes to do retroactive tax increases.

Having said that, the simple question is, "How high does the rate go?