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Managing America: Taxes

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Week Ending August 3, 2007

H.R.2776 To amend the Internal Revenue Code of 1986 to provide tax incentives for the production of renewable energy and energy conservation.

This legislation aims to revise the tax code in regard to energy matters. The bill offers tax incentives for energy production, production of plug-in hybrid autos and energy efficient buildings. Incentives are also available for establishing a non-hydrogen refueling station.

Energy conservation is addressed through various measures including a gross income tax credit for the expenses of commuting via bicycle and use of energy efficient appliances. Bonds to facilitate energy efficient housing are authorized.

Tax breaks enjoyed on income from investment in the domestic production of oil, natural gas, or any primary products would be denied while tax amortization used by major integrated oil companies would be extended from three to seven years.

Other provisions require the Secretary of the Treasury to enter into an agreement with the National Academy of Sciences for a comprehensive review of federal tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects.

What follows are the Congressional Budget Office and the House Joint Committee on Taxation explanation of the impact of the tax provision in the bill. After that is the Congressional Research Service summary of bill titles:

{Dissenting views on the bill can be read here}

JCT and CBO Explanation

Revenues and direct spending

The legislation would make several energy tax law changes. JCT estimates that enacting H.R. 2776 would reduce revenues by less than $500,000 in 2007, increase revenues by $1.8 billion over the 2007-2012 period, and increase revenues by $1.7 billion over the 2007-2017 period.

Title I includes a provision that would extend and modify the renewable energy tax credit. Currently, the production of electricity from certain energy resources (such as wind and solar energy) is allowed an income tax credit that is set to expire for property placed in service after 2008. H.R. 2776 would extend the credit for new property through December 31, 2012, and it would expand the definition of qualified energy resources. Additionally, rather than phasing out the credit (as under current law), the bill would place an annual limit on the total credits that may be claimed by a facility. JCT estimates that this provision would reduce revenues by $1.4 billion over the 2007-2012 period and by $6.6 billion over the 2007-2017 period. All in all, title I would reduce revenues, JCT estimates, by $5 million in 2007, by $2.2 billion over the 2007-2012 period, and by $7.8 billion over the 2007-2017 period.

Title II, JCT estimates, would reduce revenues by $3 million in 2007, by $2.1 billion over the 2007-2012 period, and by $5.8 billion over the 2007-2017 period. First, the title would allow a credit for plug-in hybrid vehicles, which JCT estimates would reduce revenues by $189 million over the 2007-2012 period and by $1.2 billion over the 2007-2017 period. Second, it would create energy conservation bonds to be used, for example, to finance expenditures made to reduce energy consumption. JCT estimates that this provision would reduce revenues by less than $500,000 in 2007, by $481 million over the 2007-2012 period, and by $1.5 billion over the 2007-2017 period. Third, the bill also would allow a five-year recovery period for time-based meters that measure and record electricity use at different points in the day and provides that data to the supplier or provider. Those meters are allowed a 20-year recovery period under current law. JCT estimates that this provision would reduce revenues by $371 million over the 2007-2012 period and by $1.3 billion over the 2007-2017 period.

Among other provisions, title II would restructure certain New York Liberty Zone tax incentives, which were enacted following the September 11, 2001, terrorist attacks. First, the bill would repeal the provisions that allow accelerated depreciation for certain property in the Liberty Zone. JCT estimates that repealing those provisions would increase revenue by $101 million over the 2007-2012 period and by $86 million over the 2007-2017 period. Second, the bill would provide the city of New York and the state of New York with tax credits for a certain amount of their expenditures made for transportation infrastructure related to the Liberty Zone. The credits could be used against the income taxes that the jurisdictions withhold from the paychecks of their employees and remit to the Internal Revenue Service. Because the jurisdictions do not owe federal income tax liability, the credits are considered federal spending. JCT estimates that instituting the credits would increase direct spending by $876 million over the 2007-2012 period and by $1.7 billion over the 2007-2017 period.

Title III includes multiple provisions that raise revenue. First, the bill would deny a tax deduction under section 199 of the Internal Revenue Code to any income from the sale or exchange of oil, natural gas, or related products, beginning in 2008. JCT estimates that this would increase revenues by $4.2 billion over the 2007-2012 period and by $11.4 billion over the 2007-2017 period.

Second, H.R. 2776 would modify the methods that transnational firms use to calculate their foreign oil and extraction income and their foreign oil related income. JCT estimates that these provisions would increase revenues by $4 million in 2007, by $1.6 billion over the 2007-2012 period, and by $3.6 billion over the 2007-2017 period. JCT estimates that title III as a whole would increase revenue by $8 million in 2007, by $6.1 billion over the 2007-2012 period, and by $15.3 billion over the 2007-2017 period.

Spending subject to appropriation

Section 205 would expand the use of federal employee transportation fringe benefits to include bicycle commuters. The provision would allow up to $20 per month for repairs, upgrades, and storage to employees who regularly use a bicycle for commuting purposes. Based on information from the U.S. Census Bureau, CBO estimates that about 11,000 federal employees currently commute via bicycle. Assuming the appropriation of the necessary amounts, CBO estimates that implementing this provision would cost the federal government $2 million in 2008 and about $30 million over the 2008-2017 period.

Additionally, H.R. 2776 would require two reports by the National Academy of Sciences. One report would evaluate tax provisions in the Internal Revenue Code of 1986 that affect carbon and greenhouse gas emissions, while the other report would concern biofuels, including their present status and future potential. Based on the cost of similar studies and assuming the appropriation of the specified and necessary amounts, CBO estimates that these studies would cost $2 million in 2008 and $3 million over the 2008-2009 period.

Intergovernmental and private-sector impact: JCT has reviewed the tax provisions of H.R. 2776 and has determined that they contain two private-sector mandates as defined in UMRA: the denial of deduction for income attributable to domestic production of oil, natural gas, or primary products thereof; and the clarification of determination of foreign oil and gas extraction income. The costs required to comply with each federal private-sector mandate generally are no greater than the aggregate estimate budget effects of the provision. The aggregate direct costs of the private-sector mandates in the bill would exceed the annual threshold established by UMRA for private-sector mandates ($131 million in 2007, adjusted annually for inflation) in each year beginning in fiscal year 2008.

JCT has also determined that the tax provisions of the bill contain no intergovernmental mandates. CBO has determined that the non-tax provisions in H.R. 2776 contain no private-sector or intergovernmental mandates as defined in UMRA.

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Congressional Budget Office summary

Title I: Production Incentives - (Sec. 101) Extends through 2012 the tax credit for the production of electricity from renewable resources (e.g., wind, closed and open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, and qualified hydropower). Imposes a limit on such tax credit based upon investment in renewable resource facilities placed in service after 2008 in lieu of the current phase out provisions for such credit.

(Sec. 102) Includes marine and hydrokinetic renewable energy as a renewable resource for purposes of the tax credit for producing electricity from renewable resources.

(Sec. 103) Extends through 2016 the energy tax credit for investment in solar energy and fuel cell property.

Allows an offset against alternative minimum tax liability for certain energy tax credit amounts.

Increases the credit limitation for fuel cell property.

Allows public electric utility property to qualify for the energy tax credit.

(Sec. 104) Allows a new tax credit for investment in qualified new clean renewable energy bonds.

(Sec. 105) Extends through 2009 the special rule for the treatment of gain from electronic transmission transactions by a qualified electric utility (as defined by the Federal Power Act).

(Sec. 106) Repeals the dollar limitation on the residential energy efficient property tax credit for solar electric and solar water heating property expenditures and for qualified fuel cell property expenditures. Requires performance certification of solar water heating property as a condition of eligibility for the tax credit. Allows an offset against alternative minimum tax liability of tax credit amounts.

Title II: Conservation - Subtitle A: Transportation - (Sec. 201) Allows a new tax credit for the production of qualified plug-in hybrid motor vehicles. Defines "qualified plug-in hybrid vehicle" as a motor vehicle weighing less than 14,000 pounds that meets certain emission standards under the Clean Air Act and that is propelled to a significant extent by an electric motor that draws electricity from a rechargeable battery.

(Sec. 202) Extends through 2010 the tax credit for installing non-hydrogen alternative fuel refueling property. Increases the rate of the tax credit for alternative fuel refueling property expenditures from 30 to 50% and raises the dollar limit for commercial properties to $50,000.

(Sec. 203) Extends through 2010 the income and excise tax credits for bio-diesel (including agri-bio-diesel) and renewable diesel used as fuel. Eliminates the requirement that renewable diesel be made using a thermal de-polymerization process.

(Sec. 204) Allows an alcohol fuels tax credit for the production of qualified cellulosic alcohol fuel.

(Sec. 205) Excludes from gross income for income tax purposes reimbursements for bicycle commuting expenses.

(Sec. 206) Modifies the definition of "passenger automobile" for purposes of limitations on depreciation and expensing of vehicles to include any four-wheeled vehicles that are designed primarily to carry passengers over public streets, roads, or highways and that are rated at not more than 14,000 pounds gross vehicle weight.

(Sec. 207) Allows a tax credit against payroll liabilities of New York Liberty Zone governmental units (i.e., New York State, the City of New York, or any agencies or instrumentalities thereof) for expenditures involving transportation infrastructure projects in or connecting with the New York Liberty Zone.

Subtitle B: Other Conservation Provisions - (Sec. 211) Authorizes the issuance of tax-credit energy conservation and qualified residential energy efficiency assistance bonds.

(Sec. 213) Extends through 2013 the tax deduction for energy efficient commercial building expenditures.

(Sec. 214) Revises the tax credit amounts for energy efficient appliances (i.e., dishwashers, clothes washers, refrigerators, and dehumidifiers) produced after 2007.

(Sec. 215) Allows a five-year recovery period for the depreciation of qualified energy management devices. Defines "qualified energy management device" as a device that measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day and allows for the exchange of electricity-usage information and data.

Title III: Revenue Provisions - Subtitle A: Denial of Oil and Gas Tax Benefits - (Sec. 301) Denies a tax deduction for income attributable to the domestic production of oil, natural gas, or any primary products thereof.

(Sec. 302) Increases from five to seven years the amortization period for geological and geophysical expenditures for certain major integrated oil companies (i.e., companies with an average daily worldwide production of crude oil of at least 500,000 barrels, gross receipts in excess of $1 billion, and an ownership interest in a crude oil refiner of 15% or more).

(Sec. 303) Revises the standard for calculating foreign oil and gas extraction income for purposes of the foreign tax credit to require a fair market valuation.

Subtitle B: Clarification of Eligibility for Certain Fuel Credits - (Sec. 311) Modifies the definition of "renewable diesel" for purposes of the income and excise tax credits for biodiesel and renewable diesel used as fuel to exclude any fuel derived from coprocessing biomass with a feedstock which is not biomass.

(Sec. 312) Disqualifies foreign-produced fuel that is used or sold for use outside the United States for the income and excise tax credits for alcohol, biodiesel, renewable diesel, and alternative fuel production.

Title IV: Other Provisions - Subtitle A: Studies - (Sec. 401) Directs the Secretary of the Treasury to enter into an agreement with the National Academy of Sciences for a comprehensive review of federal tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects. Requires the Academy to report to Congress on such study not later than two years after the enactment of this Act. Authorizes appropriations for FY2008-FY2009.

(Sec. 402) Directs the Secretary to enter into an agreement with the Academy to analyze and report to Congress on current scientific findings relating to biofuels production.

Subtitle B: Application of Certain Labor Standards on Projects Financed Under Tax Credit Bonds - (Sec. 411) Makes federal public buildings and works labor standards applicable to projects financed by tax credit bonds.

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Sponsor:  Rep. Charles B Rangel (D-NY-15^th)

Vote:  Passed House August 4, 2007221 to 189 RC 835. The motion to recommit the bill failed 65 to 346 RC 834

The motion to recommit

The motion to recommit was based on opposition to bill provisions that reduce oil and gas company profits because, the hold, that will limit the ability of those companies to afford further exploration at a time when the US relies too heavily on foreign oil.

The motion to recommit the bill failed 65 to 346 RC 834. It was noted that the electronic tally on the motion showed that although the motion would not pass nearly 140 Republicans and 6 Democrats supported the motion, however, Members are then allowed to change their votes before the final tally, 6 Democrats and over 70 Republicans changed their votes to oppose the motion

Cost to the taxpayers: $16 billion in outlays.  “The Joint Committee on Taxation (JCT) estimates that enacting H.R. 2776 would decrease revenues by less than $500,000 in 2007, increase revenues by $1.8 billion over the 2007-2012 period, and increase revenues by $1.7 billion over the 2007-2017 period. JCT also estimates that the bill would increase outlays by $876 million over the 2007-2012 period and by $1.7 billion over the 2007-2017 period. The Congressional Budget Office (CBO) estimates that implementing the bill would cost $3 million to $4 million annually, subject to appropriation of the necessary amounts.”

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MORE INFORMATION

DISSENTING VIEWS

Through a series of hearings, public statements and other conversations with our friends across the aisle, we mistakenly came to believe that the Majority party was serious about addressing the real and growing energy needs of this country.

Republicans and Democrats agree that the price of gasoline is far too high. We agree that we should reduce our dependence on foreign sources of energy by developing our own vast domestic and renewable energy resources. We believe that climate change is a legitimate concern, and that we must work hard to find a global solution to that problem. With such consensus on these major issues, we were optimistic that we could develop a bipartisan and effective approach to the future of energy policy in the United States.

Unfortunately, the bill approved by the Ways & Means Committee went down a different path. Rather than focus on these important issues, the bill suffers from a lack of imagination in addressing the complex energy problems we face today. For these reasons, we must oppose this bill and will push instead for a better energy policy as the legislative process evolves.

FAILS TO ADDRESS FUNDAMENTAL GOAL OF THE LEGISLATION

As noted at the outset, there continues to be bipartisan consensus on the need to address climate change and on the need to reduce our dependence on foreign sources of energy. Despite this agreement, the Majority's bill does little to address these two issues. Indeed, it may decrease our energy independence.

For example, the bill would allocate $6 billion in tax credit bonds to states and localities to use largely at their whim. The bill has no certification requirement that those expenditures actually be used to reduce greenhouse gases or fossil fuel consumption.

Likewise, the punitive tax increases on domestic oil and gas producers will almost certainly increase our reliance on foreign sources of energy. Furthermore, while higher taxes on oil and gas companies may make for good talking points for politicians complaining about the high price of gasoline, it is difficult to imagine any serious economist would agree that higher taxes will bring down prices. But as was noted during the mark-up, some proponents of the legislation would prefer to raise taxes on oil and gas for the specific purpose of driving up prices to reduce consumption. For those harboring that hidden goal, one that few politicians would be willing to utter, this bill will bring those secret dreams one step closer to reality.

PROBLEMS REQUIRE BROAD-BASED SOLUTIONS

A key component of the bill is the creation of a slush fund, financed with tax credit bonds, that will put federal dollars and few restrictions into the hands of governors, mayors of the 242 biggest cities in America, and countless other county officials, school boards and other political entities.

During the mark-up, the witnesses before the Committee confirmed that qualifying expenditures for such bonds could include hybrid Lexus police cars for Beverly Hills, hybrid snowmobiles in posh Aspen, solar panels for Al Gore's house and bicycle powered toasters for all. It was thus disappointing to see numerous Republican amendments to responsibly limit the use of these funds reflexively rejected.

GRAVE CONCERNS OVER TAX CREDIT TRAFFICKING

We are particularly concerned with the expansion of tax credit bonds in this bill. These bonds allow the purchaser to receive a federal tax credit in lieu of interest payments. Allowing states and local municipalities to issue tax credit bonds is simply an end run around the federal appropriations process.

Nevertheless, we understand that politicians like to dole out goodies. The Appropriations Committee shouldn't have all the fun. But what is disturbing is the high price of this kind of spending through the tax code.

In 2004, the Congressional Budget Office reported that the nonstandard nature of tax credit bonds reduces their liquidity, leading investors to demand a premium. As such, the cost to the federal government of using tax credit bonds is greater than the cost of financing appropriations through conventional borrowing by the Treasury Department. We do not understand why the Federal government would choose such an inefficient funding mechanism.

Even more so, we are opposed to the `strippable' feature of the tax credit bonds, an unprecedented expansion of tax credit bonds that will permit the tax credit portion of the debt to be separated from the principal and sold off to taxpayers with no other connection to the bond itself. We have substantial concerns about the ability to track the holders of these stripped credits and find this to be an odd result for a Congress that has been so concerned about the `tax gap.'

Just as in the world of fashion, what is old is new again. Strippable tax credit bonds strike chords reminiscent of the ill-fated `safe-harbor leasing' provision enacted in 1981, which allowed businesses to buy and sell tax attributes. But negative publicity came soon after passage, as stories proliferated about companies eliminating all of their tax liabilities by entering into `leasing' transactions with companies who could not use the deductions or tax credits associated with the property.

A year later, in 1982, Congress repealed safe-harbor leasing. Although no Republican Member of the Committee served in the 97th Congress, the legislative history suggests the prompt reversal was necessitated by the tax-avoidance opportunities that safe-harbor leasing created and the adverse public reaction that followed. Concerns were raised that institutionalized commerce in tax benefits was likely to diminish respect for and compliance with the tax laws on the part of the public.

We do not understand why the Majority would want to rush headlong into the mistakes of the past, especially as two of the senior Democrats on our panel were among the 226 Members of the House voting in 1982 to pass the bill that repealed safe harbor leasing. We can only wonder whether today's Majority will, like our colleagues a quarter of a century ago, beat a similarly hasty retreat and undo this mistake before the end of the 110th Congress.

ACCIDENTAL POLICY

The legislation does seem to include, albeit accidentally, a few provisions that can actually be used to reduce our dependence on other countries for energy. While we do not support the use of tax credit bonds, as approved by the Committee, these bonds could be used to fund coal-to-liquid plants. While the authors may not have intended the use of these provisions in such a way, we have little doubt that leaders in states across the country will be eager to do so.

Specifically, the bill allows the proceeds of tax credit bonds to be used for projects to `promote the commercialization of technologies for the capture and sequestration of carbon dioxide.' It does not say that the project must capture and sequester all of the carbon dioxide produced. So the bonds could be used to support carbon sequestration efforts that are a necessary part of new coal-to-liquids facilities.

We very much doubt this accidental policy will remain in the bill for long. Before it goes to the House Floor, we expect changes will be made to `fix' this `error.' Similarly, we expect the Majority will modify a provision that could allow the proceeds of the tax credit bonds to be used to promote the expansion of nuclear power.

CONCLUSION

We share our colleagues' interest in finding ways to increase our energy independence and reduce the emission of greenhouse gases. But we were presented with a bill that does not seem to move us close to those goals and, in many ways, seems to move in the opposite direction.
Jim McCrery.
Phil English.
Jerry Weller.
Ron Lewis.
Kevin Brady.
Kenny Hulshof.
Eric Cantor.
Devin Nunes.
Pat Tiberi.
Jon Porter.

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