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Hodgson Russ's Clean and Green Law

Will The Production Tax Credit Get Thrown Off the Fiscal Cliff?

Posted in Renewable Energy, Tax Incentives

As a result of a bipartisan agreement last year to raise the debt ceiling and avoid national default, the country now faces billions in federal spending cuts and tax increases. The automatic cuts are referred to as “sequestration” and were designed to be draconian and unacceptable to either political party in order to make sequestration so unpalatable to both political parties that it would essentially force future action and compromise. Fast forward several months, past a bitterly fought election, and we stand at the precipice of the “fiscal cliff.” Sequestration was never supposed to happen and, indeed, in the third presidential debate, President Obama assured the nation it would not.

Talks between the White House and Congress to avoid the fiscal cliff have centered around the percentage of “revenues” and “cuts” to be made, which must be achieved in order to strike a long-term deal. The White House is pushing tax increases on the “wealthy,” as well as the closing of yet unspecified tax loopholes, while Congressional Republicans are pushing against tax increases, and are instead lobbying for spending cuts for government programs and entitlements.

The ongoing sequestration negotiations are likely to play a key role in whether or not the production tax credit (PTC) will be renewed. The PTC is of vital importance to the wind industry and too many politicians in both political parties, where wind development projects are currently being or have already been developed. The PTC provides an income tax credit of 2.2 cents/kilowatt-hour for the production of electricity by wind turbines. The PTC’s fate is bound up in the larger discussion on taxing and spending issues, and may be lost in the back and forth vitriolic tirades that passes for debate in Washington.

Comments from those in the same party and state show the difficult path PTC renewal faces and how the issue can cross party lines. Senator Charles Grassley (R-IA) put discussion of the impending PTC expiration in perspective by stating, “as important as I think wind energy is, we’ve got a big fiscal problem here.” Senator Grassley noted that the PTC issue is but a small part of the overall fiscal cliff conversation. Complicating the debate further is some Republicans’ decision to put oil and gas subsidies on the table for elimination, while other Republicans are supporting H.R. 6603, the Tapping America’s Energy Potential through Research and Development Act of 2012, which, if passed, would allocate millions in new spending to research in unconventional fuels.

Talk of cutting current and ongoing subsidies does not bode well for the extension of other subsidies, like the PTC, that are set to expire December 31. Iowa’s Republican governor, Terry Branstad, continued to plead the wind industry’s case by noting that time is required for the industry to wean itself off of taxpayer subsidies. It has been suggested by the wind industry that without a PTC extension, the U.S. economy will lose 37,000 wind industry jobs and more than $10 billion in private investment. Many layoffs have already occurred as new orders have fallen off their own cliff.

Despite the urgings of a bipartisan group of governors, it is likely the PTC will be an afterthought in the overall debate. Meanwhile other interest groups are putting efforts forward. On November 28, a group of some forty veterans from around the country joined Sen. Mark Udall (D-CO), Sen. Charles Grassley (R-IA), Rep. Jerry McNerney (D-CA), and Rep. Steve King (R-IA) at a press conference urging Congress to extend the PTC

Without sequestration, the debate over the PTC would have likely been much more publicized. Enjoying some bipartisan support in Congress, and with a supportive White House, a PTC deal would have had a much better chance of passing than it does in the current political environment. Failure to make progress toward avoiding sequestration has muddied the issue and threatens to sweep the PTC over the cliff, and with it, the potential for construction of a number of new and permitted wind projects across the country.

 

Charles Malcomb is a senior associate in the Environment & Energy Practice at Hodgson Russ LLP. You can reach him at cmalcomb@hodgsonruss.com.