The wind industry received a belated Christmas present this year when Congress passed the American Taxpayer Relief Act of 2012 (née fiscal cliff deal). The fiscal cliff deal not only extended the wind Production Tax Credit (PTC) for another year, but expanded the credit to apply to more facilities. But that’s not all. The wind industry now wants the IRS to torture the plain language of the Act to allow even more projects to qualify.
For the past 20 years, the wind PTC required projects to be placed “in service,” by the end of the year to receive the credit. But the fiscal cliff deal expanded that language to apply to any wind facility “the construction of which begins before January 1, 2014.” Because of this expansion, the Joint Tax Committee estimates that the wind PTC will cost the Treasury $12.1 billion dollars.
Not content with this victory, the wind industry lobby now wants the IRS to interpret the term “construction of which begins” to have no reference to a physical act of construction, but rather merely mean that construction begins when five percent of the cost of the wind project has been committed. As the attached white paper will demonstrate, this would be an aberration from the many tax laws that have specified or assumed construction as actual construction work having taken place.
The Five Percent Rule Tortures the Plain Meaning of the Word “Construction” and Means Delayed Economic Benefit
If the “five percent” interpretation is implemented, many companies might make that token investment and then wait several years for technology to mature or the economy to improve. Needless to say, that outcome would be distortionary and wasteful.
If instead construction “begins” with the physical act of construction, companies that otherwise might have sat on their investments will be incentivized to commence building sooner. Earlier construction would mean that the economic benefits of construction would be realized more quickly. While more money might be paid out under the five percent interpretation, more short-term economic stimulus would come from the physical act requirement.
Senator Mark Udall, a strong supporter of the PTC extension, noted that the extension is meant to “provid[e] a strong incentive for developers to begin projects as soon as possible.” But Udall also understands that the word “construction” should have something to do with physical wok. As he stated, “So if you put a shovel in the ground on Dec. 31, at the end of this year, the tax credit will apply…”
That being the case, the policy behind the PTC extension suggests that we should interpret “begins construction” to mean, well, starting physical construction.
Ample Precedent for the Physical Work Requirement
The legal precedent is also on the side of the physical work interpretation. As shown in the attached IER white paper, there is a long history of Congress and administrative agencies interpreting similar phrases (variations on “construction begins”) to require physical work on the project. To name just a few examples, the common-sense interpretation of beginning construction prevailed in the Tax Reform Act of 1969, the Revenue Act of 1971, the Tax Reform Act of 1976, the Revenue Act of 1978, the Tax Reform Act of 1986, and the American Jobs Creation Act of 2004. The IRS itself ruled that way many times, including in 2011, 2008, and 2006.
The Five Percent Alternative
Against all that precedent, the wind lobby can only offer the American Recovery and Reinvestment Act of 2009, when the Treasury Department interpreted “construction began” as including the five percent rule as a safe-harbor provision. A safe-harbor provision is intended to protect good faith, but unsuccessful, efforts to adhere to a given law. Similar safe-harbors have appeared in other IRS guidance, but normally as a less-lenient 10% investment rule.
Bottom Line
The legal and policy arguments both weigh heavily in favor of the physical work requirement. Wind industry lobbyists would do well to accept the already-generous PTC subsidy without pushing a dubious interpretation to siphon off even more taxpayer money.
IER’s White Paper on the definition of when “construction begins” is available here.
