The following is a summary of the recently proposed energy bill, the Energy Tax Incentives Act of 2004. The summary focuses on federal tax law. It has been prepared by Mary A. McNulty, Chair of the Energy and Natural Resources Committee and a partner at Thompson & Knight LLP, and Janet P. Jardin, an associate at Thompson & Knight, as a project of the Energy and Natural Resources Tax Committee. Unless otherwise indicated, all Section references are to the Internal Revenue Code of 1986, as amended (the "Code").
- The "Old" Energy Policy Act of 2003
- The "New" Energy Tax Incentives Act of 2004
- Oil and Gas Provisions
- Section 45 Credits for Renewable Electricity Production
- Alternative Motor Vehicles and Fuel Incentives
- Conservation and Energy Efficiency
- Clean Coal Incentives
- Revenue Raisers
- The Future of the New Energy Bill
As reported in the last current developments article, Congress abandoned efforts to pass the Energy Policy Act of 2003 (H.R. 6). The legislation would have provided approximately $23.5 billion in tax breaks without any revenue offsets. The bill was aimed at encouraging conservation, domestic production, and reliability improvements. In addition, it would have extended a number of energy tax provisions that were set to expire on December 31, 2003.
On February 12, 2004, the Energy Tax Incentives Act of 2004 (S. 2095) was introduced and read for the first time in the Senate. The energy bill is sponsored by Senate Energy and Natural Resources Chairman Pete V. Domenici (R-N.M.). This is the third time that Congress has tried to pass energy legislation.
On March 5, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) offered a second-degree amendment to the bill that would generally extend several tax provisions that have expired or would have expired by one year. Four of those tax provisions are included in the energy bill.
The Energy Tax Incentives Act of 2004 varies only slightly from the tax title reported out of the Finance Committee in May 2003. Although neither the Congressional Budget Office nor the Joint Committee on Taxation has released an official "score" (or estimate of the cost to the federal government), the new energy bill is expected to score at 45 percent of the cost of the old energy bill (approximately $14 billion) without forfeiting most of the goals of the old bill. The principal difference is that the current proposal has later effective dates, which in most cases is October 1, 2004, and denies certain alternative minimum tax relief. Some of the key tax changes and Senator Grassley's proposed amendments are discussed below.
The new energy bill differs from the old bill's conference report in the following respects: (1) there is no AMT relief for intangible drilling costs, gas gathering lines, and distribution lines; (2) there are more limited Section 29 credits for existing facilities; (3) the Section 29 credit is not a general business credit; (4) there is no suspension of the percentage depletion limitation of 65 percent of taxable income; and (5) there is an Alaska natural gas production tax credit.
In the last current developments article, we reported that the circuit courts remained split as to whether gas gathering pipelines are subject to a 7-year or a 15-year recovery period. The new energy bill establishes a 7-year recovery period and a 14-year class life for natural gas gathering lines. It also establishes a 15-year recovery period and a 35-year class life for natural gas distribution lines.
The new energy bill modifies the Section 29 tax credit for fuels from nonconventional sources in numerous respects. It expands the categories of fuels for which the credit is available by adding viscous oil, refined coal, coalmine gas, and agricultural waste. Also, it would make the Section 29 credit available for qualifying liquid, gaseous, or solid synthetic fuels produced from coal for facilities placed in service October 1, 2004, through December 31, 2006. The energy bill provides a 3-year placed in service window for new wells for all qualified fuels except synthetic fuels from coal, which must meet new requirements. The amount of the credit is set at $3/barrel (or Btu equivalent) and is not adjusted for inflation. Most production is capped at a 200,000 cubic feet daily average. The Section 29 credit is reinstated and extended for certain qualified fuels produced and sold before January 1, 2006 from existing wells placed in service after December 31, 1979 and before January 1, 1993. This extension applies only to wells that produce coke, coke gas, or natural gas and byproducts produced by coal gasification from lignite. Furthermore, the 200,000 cubic feet cap does not apply to such production.
The new energy bill contains special incentives for Alaska natural gas. First, it allows a credit per million Btu of natural gas for Alaska natural gas entering a pipeline during the 15-year period beginning the later of January 1, 2010, or the initial date for the interstate transportation of Alaska natural gas. The credit may be claimed against both the regular income tax and AMT. The maximum monthly credit amount is 52 cents/million Btu (indexed for inflation). The credit is phased out beginning when the price at the wellhead exceeds 83 cents/million Btu until it exceeds $1.35/million Btu (indexed for inflation), at which point the credit is not available. Second, the energy bill establishes a 7-year recovery period and 10-year class life for Alaska gathering lines. Third, the energy bill provides for an investment credit for Alaska gas treatment facilities.
Section 45 of the Code provides for a credit against income tax for renewable electricity production. The energy bill expands the types of energy resources for which the Section 45 credit is available. In addition to wind, closed-loop biomass, and poultry waste, the energy bill would allow the credit for other than closed-loop biomass, geothermal energy, solar energy, small irrigation power, biosolids and sludge, and municipal sold waste.
The new bill differs from the old bill (as reported in conference) in the following respects: (1) there is no inflation adjustment; (2) there is no Alternative Minimum Tax ("AMT") relief; (3) there is no credit for electricity produced from landfill gas; and (4) certain credit rates and durations were scaled back, as discussed in the following paragraph.
The energy bill generally increases the Section 45 credit from 1.5 cents/kWh of electricity to 1.8 cents/kWh, but reduces the period for which the credit is available from 10 years to 5 years after the qualifying facility is placed in service in certain circumstances. The energy bill expands the placed-in-service window for wind from December 31, 2003, to December 31, 2006. The placed-in-service window for the new energy resources is from the date of enactment of the Energy Tax Incentives Act through December 31, 2006. Special rules apply to biomass other than agricultural waste.
Senator Grassley's amendment would extend the placed-in-service date under current Section 45 to include qualified facilities placed in service before January 1, 2005.
The new bill contains several alternative vehicles and fuels provisions that were deleted from the old bill in conference, including a new tax credit for electric vehicles, a retail credit for alternative fuels, and a credit for investments in alternative fuel equipment. The new energy bill allows a tax credit for the following four types of advanced technology vehicles: (1) hybrid vehicles, (2) alternative fuel motor vehicles, (3) full cell motor vehicles, and (4) electric motor vehicles. Electric vehicles are eligible for a current credit, which is increased and extended under the new bill from 2004 to 2006. In general, the credit amount is computed by adding a base credit for achieving a particular technology and an additional credit for achieving certain improvements in fuel economy. All vehicles would need to meet minimum emissions standards to qualify.
A general description of the various types of advanced technology vehicles and their respective base and additional credit ranges are set forth in the chart below
|
TYPE OF VEHICLE |
DESCRIPTION |
BASE CREDIT RANGE |
BONUS CREDIT RANGE |
|
HYBRID |
Runs partially on a rechargeable energy storage system and partially on an internal combustion engine |
$100-$400 (light duty/passenger) $1,000-$10,000 (heavy duty) |
$500-$3,000 (light duty/passenger) $1,500-$12,000 (heavy duty) |
|
ALTERNATIVE FUEL |
Runs exclusively on natural gas, liquified natural gas, ethanol, methanol, and liquified propane gas |
40% of incremental cost over cost when fitted as a petroleum fuel vehicle |
30% of incremental cost if meets most stringent emissions (other than zero) classification |
|
FUEL CELL |
Uses hydrogen fuel to generate electricity; has zero emissions; and its only byproduct is water |
$4,000 (light duty/passenger) $10,000-$40,000 (heavy duty) |
$1,000-$4,000 (light duty/passenger) None for heavy duty |
|
ELECTRIC |
Runs on batteries and "plug in;" does not recharge on its own like hybrids |
$3,500 Lesser of 10% of cost or $1,500 (low-speed) |
If capable of driving over 100 miles on a single charge |
Senator Grassley's amendment would stick with the current 10 percent (maximum $4,000) nonrefundable credit available to buyers of qualified electric vehicles, but it would eliminate the scheduled phase out between 2004 and 2006.
In all respects (except one), the new energy bill is broader than the conference report of the old bill for conservation and energy efficiency as it contains certain provisions that were either struck or reduced in conference. The new energy bill contains a credit for energy-efficient heating and cooling equipment, a credit for microturbines, and a deduction for commercial buildings, which were all defeated in Congress. The bill also contains the full credit for residential buildings, the 30 percent credit for wind and fuel cells, the full credit for appliances, and the full deduction for commercial buildings. The one respect in which the new energy bill is narrower than the conference report is the credit for existing energy efficient homes.
The new energy bill contains production and investment credits for clean coal facilities but excludes the conference report's shorter amortization period for pollution control equipment. Taxpayers must meet certain standards and obtain a certificate from the Secretary of the Treasury before they can claim the credit. Certain tax-exempt organizations, such as municipal power authorities, electric cooperatives, and the Tennessee Valley Authority, would be permitted to procure such certificates and sell, trade, or assign them, or use them to offset certain debt payments.
In general, a production credit is available for electricity generated from facilities retrofitted, repowered, or replaced with currently available clean coal technology. Investment and production credits are also available for qualified facilities that meet certain advanced capacity, thermal efficiency, and emissions standards. The amount of the advanced clean coal production credit depends upon the year the facility was placed in service, whether the facility produces solely electricity or electricity and fuels or chemicals, and the rated thermal efficiency of the facility. A facility must qualify for both the investment and production credit for advanced clean coal technologies to take either credit. The details of the clean coal credits are listed in the chart below.
|
TECHNOLOGY |
TYPE OF CREDIT |
AMOUNT OF CREDIT |
PLACED IN SERVICE WINDOW |
DURATION OF CREDIT |
|
CLEAN COAL |
Production |
0.34 cents/kWh |
Within 10 years of October 1, 2004 |
10 years |
|
ADVANCED CLEAN COAL |
Investment |
10% |
October 1, 2004 through December 31, 2016 (December 31, 2012 for certain technologies) |
N/A |
|
ADVANCED CLEAN COAL |
Production |
0.1-1.4 cents/kWh |
October 1, 2004 through December 31, 2016 (December 31, 2012 for certain technologies) |
10 years |
Unlike the old bill, the Energy Tax Incentives Act of 2004 includes many revenue raisers. These revenue raisers are expected to offset the cost of the tax incentives by $5 billion. The revenue raisers and their respective expected offsets include: (1) modification of ethanol tax incentives - $402 million (this was the only offset in the old energy bill), (2) provisions to discourage corporate expatriation - $2.7 billion, (3) provisions to discourage individual expatriation (including the relinquishment of a U.S. green card by a long-term permanent resident) - $328 million, (4) extension of Internal Revenue Service user fees - $138 million, (5) expansion of corporate tax shelter reportable transactions - $1.4 billion, and (6) addition of Hepatitis A to the list of taxable vaccines - $91 million.
On March 2, 2004, Senator Grassley stated that legislators are hoping to find additional revenue raisers of $5 billion. Also, he stated that the existing $5 billion "comes out of that $133 billion of offsets that we've got laying out there, that are soon going to be eaten up, probably three times." Some of the current revenue raisers in the energy bill are also in several pending Senate bills, such as the pending transportation spending bill. Additional revenue raisers would reduce the cost of the energy tax incentives from approximately $14 billion to approximately $9 billion, which is within the $8 billion to $10 billion range targeted by the Bush administration.
House Majority Leader Tom DeLay (R-Tex.) and other House members have remained tightlipped about reopening negotiations concerning energy policy, leaving many to wonder whether the third time will be the charm. Senate leaders, on the other hand, remain committed to passing energy legislation. Majority Leader Bill Frist (R-Tenn.) and Senate Minority Leader Tom Daschle (D-S.D.) have agreed that the new, streamlined Senate bill should be considered "swiftly, in a constrained fashion, and with as few amendments as possible." On February 23, 2004, less than two weeks after it was introduced, the energy bill was read for the second time, but not much action has occurred since that time.
On March 2, 2004, Senate Republicans stated that they intend for the energy bill to be addressed before the April recess. While working diligently, Senator Domenici, the sponsor of the new energy bill, is said to be "somewhat frustrated" because many issues still need to be resolved, such as when the bill will reach the Senate floor, whether Republicans and Democrats can agree to limit the number of amendments offered to the bill, and whether the cost of the bill can be further reduced, as discussed above.
As of yet, it is uncertain whether the energy bill will pass the Senate. The 2003 energy bill fell through because the Senate did not have enough votes to defeat a filibuster. Many blamed Senator Daschle for failing to deliver enough Democratic votes, but this time he does not expect the same result. Although no whip count has been conducted, Senator Daschle is "reasonably confident" that there are "more than 60 votes should there be any effort to delay final passage."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
