Infrastructure bill and clean energy
Renewable energy projects that are considered under construction this year for tax purposes may not be able to claim tax credits at the higher rates that President Biden is proposing.
Developers should probably wait before starting construction of any additional projects.
A project is considered under construction for tax purposes once at least 5% of the total project cost has been incurred or once “physical work of a significant nature” starts at the site or at a factory on equipment for the project.
The US Treasury released a “green book” at the end of May with the details behind the Biden tax proposals.
The administration is proposing to restore production tax credits and the investment tax credit to their full levels for projects on which construction starts after this year. The credits would remain at the full amount — 2.5¢ a kilowatt hour plus inflation for wind production tax credits and a 30% investment tax credit for solar — for projects on which construction starts during the period 2022 through 2026 before phasing down over the following five years.
Biden is facing a complicated puzzle in the Senate as he tries to advance his clean energy agenda. Everything must be folded into a large infrastructure bill.
Talks between Biden and Senator Shelley Moore Capito (R-West Virginia) in an effort to reach agreement on a bipartisan bill ended in early June after failing to produce an agreement.
A separate group of 10 Senators, including Mitt Romney (R-Utah) and Joe Manchin (D-West Virginia), said on June 10 that it had reached agreement on its own bipartisan plan, but many details appeared still to be determined as the NewsWire went to press.
It is unclear whether Democrats have the votes to put through a plan on their own. Joe Manchin continues to insist that he wants a bipartisan bill. The Democrats cannot afford to lose a single vote in the Senate if they plan to act alone.
Clean energy has not been part of any Republican offers in the bipartisan talks.
There is a danger of the Democrats losing the momentum they had last spring when Biden first proposed a $2.3 trillion infrastructure plan.
Another complication is a ruling by the Senate parliamentarian in early June that made clear the Democrats have only one more “budget reconciliation” card to play this year to put through bills by a majority vote in the Senate (rather than the 60 votes in the 100-member Senate that are required to pass bills in the face of Republican filibusters).
Biden has ambitious plans that include social infrastructure that would have to be packaged with more traditional infrastructure to put through under a single budget reconciliation card.
If a bipartisan bill emerges, it would also complicate action on clean energy if clean energy is not included because it is unclear the Senate has the time or appetite to pass two infrastructure bills this year.
Meanwhile, the Senate Finance Committee voted the last week in May for a Wyden tax credit bill that would rewrite and increase tax credits on clean power plants, energy storage facilities and new transmission lines at 275 KV or higher voltage that are placed in service after 2022. The new tax credits would be allowed on projects that are completed in 2022 or later even though they are already under construction when the bill is enacted. Tax basis would count for the investment tax credit only to the extent built up after 2022. The committee staff may still be thinking about the transition rules.
Project owners would have the option to receive the new tax credit value in cash through an IRS refund process with a one-year lag.
However, there is a tradeoff. To qualify for the new tax credits, contractors and subcontractors would have to pay prevailing wages as determined by the US Department of Labor, and use qualified apprentices for at least 15% of total labor hours, not only during construction but also on repairs and improvements during the 10-year period that production tax credits are claimed or the five-year recapture period if an investment tax credit is claimed.
Senator John Cornyn (R-Texas) tried to strike language in early June in a proposed US Competition and Innovation Act that would require payment of prevailing wages by semiconductor manufacturers in exchange for federal assistance to ramp up semiconductor production at “mature nodes.” The effort failed 42 to 58 as eight Republican Senators joined with Democrats to support the wage provision.
The Senate Finance Committee vote on the Wyden bill was an effort by the committee chairman, Ron Wyden (D-Oregon), to put down a marker for a technology-neutral approach to tax credits in any infrastructure bill that moves this year. Any infrastructure bill is expected to move through the House first before trying to clear the Senate. (For more details about the Wyden bill, see “Wyden bill and tax credits” at www.projectfinance.law.)