by Ari Natter and Brian Eckhouse
A deal meant to preserve a key source of financing for wind and solar developers in the Republican tax bill contains some hidden pitfalls that could undercut its benefit.
"If Congress thought they were eliminating the trouble for renewables, they were wrong,” Greg Jenner, a partner at law firm Stoel Rives LLP, said in an email Monday. "It’s a question of how bad it will be."
Tax lawyers such as Jenner are still unraveling the implications of the compromise bill that was released late on Friday. Renewable-energy proponents initially exhaled after the bill reworked a provision in the Senate bill that threatened to disrupt the industry’s $12 billion tax-equity market. The compromise version of the bill would allow companies to offset as much as 80% of their foreign-transaction tax with renewable-energy credits.
Most solar and wind developers get tax credits for their projects using the investment tax credit or production tax credit, respectively. Because those developers often don’t have a large tax liability, third parties such as banks or insurance companies will invest in a renewable project, effectively in exchange for the credits.
The consternation is over the Base Erosion Anti-Abuse Tax, or BEAT, which was included in the Senate bill. The provision is meant to close loopholes for multinational companies -- including banks and insurers -- that make payments to overseas affiliates.
“We are grateful to our champions in Congress for their work to craft a pro-business tax reform bill that will continue the success story of American wind power,” Tom Kiernan, the chief executive officer of the American Wind Energy Association, said in a statement Monday.
A number of details in that reworked proposal could threaten the usefulness of that tax credit, Jenner and other lawyers say. First, the compromise would expand which companies would be subject to the BEAT tax. A company that makes 3% of its deductible payments to a foreign affiliate falls under the provision, down from 4% in the Senate bill. It’s even lower – 2% -- for banks.
Second, because these companies won’t know if they face a BEAT tax bill, they may be unwilling to do a tax-equity deal with a renewable developer.
Third, that 80% offset expires in 2025, so wind projects in particular, may have their production tax credit curtailed over time.
Separately, because the overall corporate tax rate will be cut to 21% there may be less demand for renewable tax credits.
All of this means there is great uncertainty now in the future of this $12 billion tax-equity market.
"It creates a lot of questions even as it solves some," said Greg Wetstone, president of the American Council on Renewable Energy. "The BEAT program will make it harder to use the tax credits -- even though it’s significantly improved from what we were presented with” in the Senate, he said.
There are at least $3 billion "in investments that are currently on hold," John Marciano, partner at law firm Akin Gump Strauss, Hauer & Feld LLP in Washington, wrote in a report. "This could affect $100 billion of power investments in the next ten years."
The BEAT restrictions may prompt “a few banks” to drop out early in 2018, but the revisions to the provision should be enough to keep most investors in the market, said Keith Martin, a partner at Norton Rose Fulbright LLP in Washington. The bigger impact according to Martin: projects will likely have to rely less on tax-equity financing under the new plan. Today, tax-equity covers as much as 60% of wind-project costs and up to 50% of solar-project costs, he said.
To be sure, the overall bill, which Congress is expected to send to President Donald Trump this week, includes major wins for the renewable industries, including nixing a House provision to reduce the value of the wind industry’s tax credit and eliminating the corporate alternative minimum tax. Just like other companies, developers will have their main tax rate cut and will get to write off the expense of equipment immediately, rather than having it depreciate over time, Martin wrote.
"The ultimate outcome may be very situational depending on investor," said Timothy Fox, a vice president at the consulting firm ClearView Energy Partners LLC. "Renewable power advocates may not be completely happy with this language, but we suspect they may be sighing a sigh of relief."
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