President Obama has identified it as a priority, House Speaker John Boehner has mentioned it as a potential solution to the national debt and some time next year, the 113th Congress is expected to take the first meaningful stab at federal tax reform in nearly three decades.
And energy companies and energy market players could factor into the likely contentious, marathon reform debate more than expected as lawmakers eye industry tax breaks, production incentives and even treatment of oil and gas trades.
Whether they’ll be swept into the larger reform debate or dealt with separately, here’s a look at five tax changes the energy sector expects to at least get broached during the tax debate:
Renewables as MLPs
In what may prove to be a rare bipartisan effort, Senator Chris Coons, a Delaware Democrat, and Representative Ted Poe, a Texas Republican, said they plan to introduce companion legislation early next year that would allow renewable-energy projects to form master limited partnerships, or MLPs.
This, Coons and Poe argue, would give wind farms, solar-energy facilities and other clean-energy projects access to lower-cost capital.
MLPs are business structures which are taxed as partnerships, but have ownership interests which can be publicly traded. Oil, gas and mining projects have been forming as MLPs for decades.
Under the current tax code oil, natural gas, coal extraction and pipeline projects can be structured as MLPs, but renewable-energy projects cannot due to a section of the tax code which requires 90% of an MLP’s income to come from “depletable” energy resources, such as crude oil and natural gas.
“Small tweaks to the tax code could attract billions of dollars in private-sector investment to renewable-energy development, reduce the cost of renewable electricity by up to one third, and dramatically broaden the base of eligible investors,” 20 congressional Democrats and three Republicans in favor of the legislation wrote in a recent letter to Obama.
Oil and Gas Subsidies
Earlier this month, more than 70 House Democrats sent a letter to Boehner and Obama, calling on them to eliminate billions of dollars in tax breaks and loopholes given to the oil and gas industry.
These Democrats hoped to end the $4 billion in taxpayer subsidies the industry received annually and the $1 billion per year in royalty-free drilling on public lands, according to Representative Ed Markey, the top Democrat on the House Natural Resources Committee.
Federal incentives for profitable oil and gas companies has long been seen as a target for Democrats, but they may represent “only the tip of the iceberg,” wrote Peter Lehner, executive director of the Natural Resources Defense Council.
Lehner recommended that lawmakers could also target oil company accounting methods which allow them to minimize tax liabilities when oil prices are high and loophole in the Foreign Tax Credit.
“When added to the other fossil subsidies, these two items alone would nearly double the budget benefits to almost $80 billion over ten years,” Lehner wrote.
60/40 Tax Treatment
Nearly a year ago, US Senator Carl Levin, a Michigan Democrat, introduced the Closing the Derivatives Blended Rate Loophole Act, legislation aimed at closing a more than 30-year-old tax loophole for commodity futures and options trading.
At issue is Section 1256 of the US tax code, which allows 60 cents of every dollar earned by a futures or options dealer to be taxed at the capital gains rate while the remaining 40 cents is taxable at the ordinary rate, known as 60/40 tax treatment.
At the time, Levin called the blended tax rate a “Wall Street giveaway,” which he said “distorts the financial markets and reduces tax revenues to the benefit of the fortunate few.”
The bill has languished in committee and no companion legislation was introduced in the House, but since it does have the backing of Obama, as well as billionaire investor Warren Buffett, it’s a reasonable bet to expect 60/40 to come up during reform talks next year.
Financial Transaction Tax
It may never get passed, but at least one member of Congress will almost certainly introduce legislation for a financial transaction tax in the next Congress. Although the numbers have differed slightly, more than a dozen such bills have been introduced in the House and Senate since 2009, although none garnered real transaction in the face of Republican and industry opposition.
Last year, an analysis by the Joint Committee on Taxation found that a proposal that would levy a 0.03% tax on stocks, futures, swaps and other derivatives would raise an estimated $352 billion over nine years.
NYMEX parent CME Group, one of the most vocal opponents of a transaction tax, has long argued that such a tax would drive trading overseas or away from regulated markets entirely.
Overhaul of efficiency incentives
Energy efficiency has long been seen as one of the few policy areas where federal lawmakers can actually find traction. During the lame duck session, for example, arguably the only real energy legislation passed by both chambers was a technical efficiency bill.
But how the government incentivizes efficiency is expected to get close examination.
During a Senate hearing this month, Steven Nadel, the executive director of the American Council for an Energy-Efficient Economy, said Congress needs to amend the US tax code to better incentivize homeowners and businesses to invest in energy-efficient technologies. Tax incentives since the 1980s have been aimed at promoting technologies that homeowners and businesses were already buying, he said. For example, roughly 85% of all windows in the US market qualify for a federal efficiency incentive, Nadel said.
Nadel said these federal incentives should instead “target long-term structural changes in the market, using temporary federal assistance to build the market for energy-efficient products so [ineffective] tax incentives can be phased out.”
Nadel said Congress could use Japan’s Top Runner program as a model. That program, which Japan launched in 1998, sets efficiency standards for multiple products, such as air conditioners and televisions, by determining the most efficient model in a given category. That most efficient model is used as a baseline for the efficiency standards for that product sold in Japan.
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