For the past 25 years, the federal government has coddled the wind industry by lavishing upon it billions of dollars’ worth of subsidies. The most prominent of these subsidies is the Production Tax Credit (PTC), which now costs Americans over $5 billion dollars per year. Embroiled in the current tax debate is a set of provisions that would put an end to the wind PTC—a process that was supposed to be put in place by Congress in 2015, but was prevented by a loophole in the IRS guidance.
Protecting Americans from Tax Hikes Act
The Protecting Americans from Tax Hikes Act of 2015 (PATH) included an incremental reduction of the wind PTC of 20 percent each year for wind projects that were started after 2016. However, shortly after this law was passed, the IRS released guidance giving projects started before 2020 four years to be completed and in service before the IRS required details on the project.
This made it easy for projects to claim they started construction in 2016, avoiding the declining PTC altogether and effectively transforming the four-year process of phasing out the wind PTC into an extension of the program. As Lisa Linowes notes, this created a surge in wind energy production in early 2017, as producers scrambled to be eligible for the wind PTC:
Safe-harbored turbines under contract in early 2017 ballooned to between 30,000 and 70,000 megawatts (MW) with Bloomberg New Energy Finance projecting 38,000 MW of new wind being placed in service by 2020. Without reform, the PTC tax will grow to an additional $32+ billion in the next decade, not including the credits awarded projects already operating.
2017 Tax Bills
The House tax bill is attempting to rein in the IRS’s guidance through the “Special Rule for Determination of Beginning of Construction.” This rule will clearly define when a wind project was started, therein re-establishing the Congressional intent of PATH to phase-out the wind PTC. The House bill does not eliminate the IRS’s guidance that allowed the wind PTC to continue; instead, it clarifies PTC eligibility by adding the following provision:
The construction of any facility, modification, improvement, addition, or other property shall not be treated as beginning before any date unless there is a continuous program of construction which begins before such date and ends on the date that such property is placed in service.
The Senate tax bill does not address the PTC, but adds a so-called Base Erosion Anti-Abuse Tax (BEAT). Though indirect, this provision could have a nullifying effect on the wind PTC. In effect, the BEAT provision would require recipients to pay back wind energy tax credits. As of this writing, the BEAT provision’s final inclusion is uncertain.
Linowes’ commentary at Master Resource describes the BEAT provision in the following way:
As presented, the provision would act as an alternative minimum tax that in any given year could cancel the benefit of claiming PTCs. It’s conceivable that tax credits may be taken in one year of a multi-year wind deal and lost to the government in the next, thus raising doubts over whether investors will take the risk.
Conclusion
For decades, taxpayers have kept wind projects afloat through this complex system of subsidies, yet wind energy remains economically unfeasible. Unsurprisingly, the wind lobby is fighting reform because it will put an end to a loophole that has kept billions of taxpayer dollars flowing to their industry. It’s time to end this system of giveaways and allow genuine price signals to guide our selection of electricity generation.
