The Camp Tax Reform Bill

The Camp Tax Reform Bill

April 01, 2014

The Camp tax reform bill has many provisions that would affect independent power and other infrastructure projects in the United States.

The bill was released as a discussion draft by the Republican chairman of the House tax-writing committee, Dave Camp (Michigan), in February. It is not expected to be enacted this year, and Camp is retiring at the end of the year. However, it may serve as a marker for future efforts in Congress to reduce corporate income tax rates.

Both major political parties want to reduce the corporate income tax rate. Republicans want to take the rate from the current 35% to 25%. The Obama administration said it would support a 25% rate for income from domestic manufacturing and 28% for other income. The current Congress has been unable to reach agreement on much of anything. Elections are scheduled for November. Republicans control the House and, based on current polls, have a good chance of also having a majority in the Senate after November.

The corporate tax rate cannot be reduced without eliminating tax breaks or imposing new taxes to make up the lost revenue.

The Camp bill is the first serious effort to show how this might be done.

The bill would reduce the corporate tax rate to 25%, but not until 2019. The rate would be reduced by 2% a year over five years from 2015 through 2019. The bill includes more than 200 revenue raisers.

Production tax credits would revert to their original uninflated value of 1.5¢ a KWh for electricity sold after 2014. Production tax credits for refined coal would revert to $4.375 a ton for refined coal sold after 2014.

Wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects built in the future qualify for production tax credits on the electricity output under current law if the projects were under construction by December 2013. There is no hard deadline in current law to complete projects that were under construction in time. However, the developer must show he worked continuously on the project after 2013. The IRS has said it will not challenge whether the work was continuous for projects that are completed by the end of 2015. The Camp bill would reverse this IRS decision and require developers of all projects completed after 2013 to show that the projects were under continuous construction.

The bill would also repeal production tax credits for electricity and refined coal altogether after 2024. The credits normally run 10 years after a facility is completed. The repeal would mean projects completed after 2014 would not qualify for a full 10 years of credits.

The bill would repeal investment tax credits for solar and geothermal projects that are put in service after 2016. Such projects qualify currently for a 30% investment tax credit if completed by December 2016 and a 10% credit after 2016. The 10% credit would be repealed.

The bill would also repeal a 30% residential tax credit for homeowners who install solar systems after 2014. The credit had been scheduled to run through 2016. Any such move would provide a stronger incentive than exists currently for homeowners to buy electricity or lease systems from solar rooftop companies that retain ownership of the systems.

The federal government provides tax subsidies currently for renewable energy that are worth at least 56¢ per dollar of capital cost for the typical renewable energy project. Roughly 26¢ of the 56¢ is the value of the tax savings from depreciation. The Camp bill would slow down the depreciation on assets placed in service after 2016. Such assets would have to be depreciated on a straight-line basis over the “class life,” which is 12 years for wind and solar projects and 20 years for gas-fired power plants. The unrecovered basis would be adjusted each year for inflation before applying the depreciation percentage.

Independent power companies must connect their power plants to the utility grid in order to get their electricity to market. The utility pays the cost of the intertie, but requires the independent generator to reimburse it for the cost. The cost reimbursements do not usually have to be reported by the utilities as income based on a position the IRS took starting in 1988 that the cost reimbursements are effectively capital contributions to the utilities, even through they are made by persons who are not shareholders. The Camp bill would require all capital contributions to be reported as income by any corporation or partnership receiving them in the future, unless the capital contribution is made in exchange for shares or a partnership interest. This would make interconnection more expensive since any utility would want to be reimbursed not only for the cost of the intertie, but also for the taxes it would have to pay on the cost reimbursement.

Developers who receive grants of property from local governments as an inducement to build projects would have to pay taxes on the grants.

A number of wind and solar developers have signed so-called prepaid power contracts with utilities. The utilities prepay the developer for a share of the electricity that will be delivered over time. The developer treats the prepayment as an “advance payment.” IRS rules allow the payment to be reported as income over time as the electricity is delivered. The Camp bill would override the IRS regulation that allows for this deferral after 2014. It is not clear whether all remaining deferred payments under existing contracts would have to be reported in 2015.

The bill would slow down tax amortization of amounts spent to put contracts and other intangible assets in place. Such amounts would have to be amortized on a straight-line basis over 20 years rather than 15 years.

Various changes would be made that would make it harder to use REITs, or real estate investment trusts, other than for pure holdings of land and buildings. These are described later in this column in a separate news item about REITs.

The bill would tax master limited partnerships, except for minerals and natural resources businesses, like corporations effective after 2016. There is no provision to “grandfather” existing MLPs.

The Camp bill would repeal the authority for state and local governments to issue “private activity bonds” after 2014. These are bonds that are sold in the tax-exempt bond market, but whose proceeds are used for projects that are owned or leased by private companies or, in some cases, operated by private companies.

State and local pension funds would have to pay taxes on any unrelated business taxable income (like other non-profit entities). An example of unrelated business taxable income is earnings from a partnership that owns a power plant. The change would force state and local pension funds to hold equity positions in such projects through blocker corporations to the extent they do not do so already or to limit their participation in such projects to the role of lenders.

An especially controversial provision in the Camp bill would require large financial institutions with more than $500 billion in total consolidated assets to pay a quarterly excise tax of 0.035% of asset value above $500 billion starting in 2015. The excise tax is expected to raise $86 billion over 10 years. The $500 billion threshold would be indexed to GDP growth. JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, AIG, GE Capital, Prudential Financial and MetLife all have more than $500 billion in assets.

By Keith Martin