Washington, D.C. – Senate Energy Committee Chairman Pete V. Domenici and Ranking Member Jeff Bingaman are cheered by the productive, bipartisan progress made on energy legislation last week.  Among the accomplishments was Senate Finance Committee passage of a package of tax incentives which pretty closely track the policy recommendations in the broader energy bill.  That tax legislation will be added to the energy bill this week.

 

“The two packages together nicely reflect the broad, bipartisan views of this Senate and will make a meaningful difference in energy supply, energy prices, our economy and our environment,” noted Chairman Domenici.

 

 “I’m pleased that we have such a strong, balanced package of energy tax incentives,” added Sen. Bingaman, a member of the Finance Committee.  “This was a priority for me and, judging from this legislation, also for Senators from both sides of the aisle.”

 

 

Overview of the Energy Tax Policy Incentives Act of 2005

 

A. Electricity Infrastructure

 

1.      Extend and modify section 45 tax credit for electricity produced from renewable resources.  Under present law, section 45 allows a tax credit of 1.9 cents per kilowatt hour (kWh) for electricity produced from wind and closed-loop biomass during a 10-year period.  Electricity from geothermal and solar qualifies for the same credit amount over a 5-year period.  Open-loop biomass, small irrigation hydropower and municipal solid waste are eligible for a 0.9 cents per kWh credit over a 5-year period.  These credits expire for facilities placed in service after 12/31/05.  Refined coal is also eligible for the production tax credit through 12/31/08.  The mark makes the following changes:

 

?        Extends section 45 placed in service period through 12/31/08 for all facilities;

 

?        Removes solar as an eligible resource; and

 

?        Adds fuel cells as a qualifying resource at the same credit rate and duration as geothermal.

 

 

2.      Clean energy bonds for renewable source electric facilities.  Governmental units, electric cooperatives and tribes are not able to use the section 45 tax credit, because they are generally not taxed.  The provision authorizes $1 billion of tax credit bonds to finance section 45-type facilities.

 

 

 

3.      Treatment of electric cooperative income (85/15 test).  The rules for tax-exempt electric cooperatives require that 85% of the cooperative’s income consists of amounts collected from members of the cooperative to meet losses and expenses of providing service to its members (85/15 test).  This test has made it difficult for cooperatives to participate in electricity market deregulation and open access transmission of electricity.  In the Jobs Bill, the 85/15 test was modified to exclude certain income related to electricity restructuring from the 85/15 test.  Those changes expire on 12/31/06.  The provision makes the Jobs Bill changes permanent. 

 

 

 

4.      Sales of electricity transmission property to implement restructuring policy.  The Jobs Bill included a provision to allow a longer recognition period for electric utilities that sell their transmission assets to a FERC-approved independent transmission company.  Rather than paying tax on any gain from the sale in the year that the sale is completed, utilities will have 8 years to pay the tax on any gain from the sale.  The rule expires at the end of 2006.  Provision allows sales during 2007 to qualify for the 8-year recognition.

 

 

 

5.      Production tax credit for nuclear power facilities.  No tax credit for electricity produced at nuclear power facilities under present law.  Provision establishes a production tax credit for new nuclear power facilities.  Credit amount is 1.8 cents per kWh for electricity produced over an 8-year period.

 

 

 

6.      Credit for investment in clean coal facilities.  No tax credit for clean coal facilities under present law.  Provision establishes a 20% investment tax credit for clean coal facilities producing electricity and a 20% investment tax credit for coal gasification units primarily producing fuels and chemicals.

 

 

 

7.      Clean energy bonds for clean coal facilities.  Governmental units, electric cooperatives and tribes would not be able to use the clean coal investment tax credit, because they are generally not taxed.  The provision authorizes $1 billion of tax credit bonds to finance clean coal facilities.

 

 

 

B. Domestic Fossil Fuel Security

 

 

 

1.      Investment credit for coke manufacturing facilities.  Coke is a fuel from the residue of coal left after distillation or other feedstock (such as petroleum).  There is no present law tax credit for coke facilities.  Provision creates a 20% investment tax credit for metallurgical coke facilities that meet certain emission limitations.  

 

 

 

2.        Expensing for refinery investments.  Allows taxpayers to expense (depreciate immediately) refinery investments which increase the capacity of an existing refinery by at least 5% or increase the throughput of qualified fuels by at least 25%.  Qualified fuels include oil from shale and tar sands.

 

 

 

3.      Cooperative pass-through of the expensing related to costs to comply with EPA sulfur regulations for small refiners.  The Jobs Bill included a provision to allow taxpayers to expense certain costs for investments to comply with EPA low sulfur diesel regulations.  Provision allows the deduction to be passed-through to members of a cooperative.

 

 

 

4.      Enhanced oil recovery (EOR) credit for carbon dioxide injections.  Present law provides a 15% tax credit for enhanced oil recovery costs.  Provision increases EOR credit to 20% for EOR projects that use carbon dioxide flooding as an oil recovery method.  The carbon dioxide must be from a man-made industrial source or separated from natural gas at a natural gas processing plant.

 

 

 

5.      Natural gas distribution lines treated as 15-year property.  Gas distribution lines must be depreciated over 20 years under present law.  Provision shortens the depreciation period to 15 years for property placed in service after the date of enactment and before January 1, 2008.

 

 

 

C. Conservation and Energy Efficiency Provisions

 

 

 

1.      Energy efficient commercial building deduction.  The provision allows a deduction for energy efficient commercial buildings that reduce annual energy and power consumption by 50 percent compared to the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) standard.  The deduction would equal the cost of energy efficient property installed during construction, with a maximum deduction of $2.25 per square foot of the building. 

 

 

2.      Energy efficient new homes.  Provision allows a credit to the contractor of new energy efficient homes that achieve either 30 percent or 50 percent energy savings over the 2003 International Energy Conservation Code (IECC).  The maximum credit is $1,000 for 30 percent homes and $2,000 for 50 percent homes.  Manufactured homes certified by the Energy Star Labeled New Home program would also be eligible for the $1,000 credit. 

 

 

 

3.      Deduction for business energy property.  Provision allows a deduction for the purchase of water heaters, heat pumps, air conditioners, furnaces and other equipment that achieve certain efficiency levels.  The deduction varies based on the type of equipment and its efficiency.  Also includes a deduction up to $6000 for improvements to residential rental property.

 

 

 

4.      Credit for non-business energy property.  Provision creates a tax credit for the purchase (and use in a residence) of water heaters, heat pumps, air conditioners, furnaces and other equipment that achieve certain efficiency levels.  Credit varies based on the type of equipment and its efficiency.  Also includes a tax credit up to $2000 for energy efficiency improvements to existing homes.

 

 

 

5.      Combined heat and power.  Provision establishes a 10% tax credit for the cost of new property that uses the same energy source for generation of both electrical power and steam or thermal energy (heat).

 

 

 

6.      Energy efficient appliances.  Provision establishes tax credit for efficient dishwashers, clothes washers, and refrigerators.  Credits vary depending on the efficiency of the unit.

 

 

 

7.      Residential solar hot water, photovoltaics and fuel cell property.  No present law tax credit for energy efficiency residential property.  30% tax credit for the purchase of solar, photovoltaic and fuel cell property.  Credit capped for solar at $2000 and capped for fuel cells at $500 per ½ kilowatt of capacity.

 

 

 

8.      Business credit for fuel cells and stationary microturbine power plants.  Present law provides 10% business tax credit for solar and geothermal property.  Provision creates 30% investment tax credit for fuel cells and 10% credit for microturbines.

 

 

 

9.      Business solar investment tax credit.  Present law provides 10% business tax credit for solar and geothermal property.  Provision increases the 10% investment tax credit for solar property to 30%.

 

 

 

D. Alternative Motor Vehicles and Fuels Incentives

 

 

 

Alternative vehicle credit.  Present law allows a deduction of $2000 for clean fuel passenger vehicles.  The deduction increases to $50,000 for larger vehicles.  Deduction expires after 2006.  Provision establishes tax credits for fuel cell vehicles, hybrid vehicles and alternative fuel vehicles.  The credits range from $400 to $40,000 depending on the type of vehicle (fuel cells get bigger credits), the size of the vehicle (big trucks and buses get bigger credits) and fuel economy.  Taxpayer may not claim the present law deduction and the tax credit.

 

 

Electric vehicle credit.  Present law includes a 10% tax credit for the cost of electric vehicles.  It expires after 2006.  Provision modifies the credit and extends it through 2009.  Credit ranges from $1500 for passenger vehicles to $40,000 for large trucks.

 

 

Alternative fuel refueling property.  Present law includes a deduction for the cost of clean fuel refueling property up to $100,000.  Deduction expires at the end of 2006.  Provision establishes a 50% credit for the cost of installing clean fuel refueling property.  Maximum credit is $30,000 for a retail refueling station and $1000 for residential equipment.

 

 

Volumetric excise tax credit for alternative fuels.  The Jobs Bill created the volumetric excise tax credits for ethanol and biodiesel.  The credit for ethanol is 51 cents per gallon, and the biodiesel credit is 50 cents or $1 depending on the feedstock.  The proposal expands the volumetric excise tax credit to other alternative fuels, including propane, natural gas, Fischer-Tropsch diesel, fuel from biomass, and other fuels.  The credit is 50 cents per gallon.  All of the fuels, except hydrogen, must pay the highway motor fuels excise tax to qualify for the credit.

 

 

Extension of biodiesel tax credit.  The Jobs Bill created the volumetric excise tax credits for ethanol and biodiesel.  The credit for ethanol is 51 cents per gallon, and the biodiesel credit is 50 cents or $1 depending on the feedstock.  The credit for ethanol expires at the end of 2010.  The biodiesel credit expires at the end of 2006.  The provision extends the biodiesel tax credit through 2010.

 

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