major tax subsidies for non-renewables have become a permanent fixture in the tax code. The total cost of federal tax expenditures for energy efficiency and renewable energy development is between $600 million and $1.5 billion for fiscal year 1985. The actual cost is difficult to determine because Treasury does not identify ITC, A CRS, or business energy tax credits used for renewables and conservation separately from synfuels and coal conversion If we Assume that half of the business energy tax credits are used for renewables and conservation, the total federal tax expenditure for these technologies in FY 1985 would be a bo ut $1 billion. That compares to more than $26 billion in tax expenditures for the development of non-renewable energy resources. TREASURY I: REMOVING THE TAX CODE FROM ENERGY POLICY In sharp contrast to the long list of provisions just described, Treasury I can be described very briefly: none of the above If adopted it would be a major step toward a "level playing field," with energy investments being made according to their economic merits, rather than being based on maximizing tax subsidies For all the reasons we have criticized the present tax code, we would welcome Treasury L While the environmental community strongly supports the extension of solar and conservation tax credits, a number of organizations, including Environmental Action and Solar Lobby, have publicly supported the energy provisions in Treasury I, even though it would repeal these very credits We believe that conservation and renewables will prove to be economically competitive without tax breaks, if all tax and budget subsidies are removed for all energy sources, That means all energy tax subsidies described above should be phased out, taking HR2001, "The Renewable Energy and Conservation Transition Act of 1985," as a model. Treasury I serves as the benchmark for reform of energy tax policy, be cause tax subsidies are removed across the board. TREASURY II: UNFAIRNESS MASKED AS REFORM Under Treasury II, investments in renewables and conservation would face an even greater disadvantage than under current law. Over all, Treasury II would restore $13 billion in tax expenditures for non-renewables and just $140 million for renewables, 1.1 percent of the total, according to calculations by EAF. Energy conservation would lose present tax credits and only capitalintensive measures such as co generation would benefit from acclerated de preciation provisions. All residential credits for renewable and conservation investments would be eliminated, as would most business credits Further, the tax life for renewables would be doubled, Thus renewables would lose half of their depreciation benefits--the only benefits they would receive under Treasury IL Treasury II would remove some significant subsidies to the energy industry, including the ITC, expensing of construction period interest, pollution control bonds, percentage depletion (except for stripper wells), and some smaller tax benefits such as capital gains treatment of coal royalties. How ever, the largest tax expenditure in the energy sect or--ACRS--would be reduced only slightly and, depending on the rate of inflation, CCRS could prove more beneficial than the present ACRS For electric utilities, the tax life for coal-fired plants decreases from 15 to 10 years almost offsets the effect of the lower tax rate. Mining and oil field machinery is given a 6-year tax life, half of the 12-year close-out period in Treasury L Under Treasury II, only renewables would be hurt badly. Considering that generating plants typically operate for 30 years or more, what justification does the Administration offer for placing power plants in the 10-year category? Absolutely none. In fact, the Treasury II plan even suggests that the 10-year category for electric power plants might be overly generous (page 151). Under Treasury I, power plants would be depreciated over 38 years, a far better reflection of their economic life. From the information available, the oil and gas industry would appear to keep about half its present subsidies. It is irresponsible to promote tax policy which encourages over-consumption of our limited oil and gas resources by under pricing the resource through subsidization and thus discour aging further improvements in energy efficiency. We are, in effect, encouraging the production of our limited natural resources and then throwing them away in our inefficient cars and uninsulated homes, Table I also lists anticipated tax expenditures under Treasury II, assuming a constant rate of investment, so that they can be compared to present law. The treatment of each major tax subsidy by Treasury I and II and by Bradley-Gephardt and Kemp-Kasten are detailed in Appendix B TAX EXPENDITURES FOR ELECTRIC UTILITIES Because of the large investment required to build a power plant, electric utilities make extensive use of investment credits, ACRS, expensing of construction-period interest, and tax-exempt pollution control bonds. In addition to these general capital subsidies, the federal tax code offers several tax benefits which are intended solely for utilities. These include tax breaks on dividends for certain utility common and preferred stock and the use of tax-exempt bonds for the local furnishing of electricity. Tax expenditures for electric utilities cost the federal Treasury over $12 billion annually, according to calculations by EAF. Tax benefits provide electric utilities with an e nor mous subsidies for building new pow er facilities. Edison Electric Institute, the utility trade association, has stated that in 1983, "24 percent of the funds needed to meet our industry's construction requirements were derived through the utilitization of the se taxoriented incentives." ACRS. The largest utility tax subsidy comes from the generous depreciation provisions passed in the 1981 tax act, which amounts to a bo ut $5 billion annually. A 30-year investment in a coal-fired power plant, for instance, can be written off in just 15 years because of the shortened tax life provisions of ACRS. Moreover, because depreciation can also be accelerated during that period, most of the plant can be depreciated in about 6 1/2 years, Nuclear plants receive even more favorable treatment, with a tax life of just ten years. Under A CRS, most of a 30-year nuclear investment can be written off in just four years. Besides encouraging new investments, ACRS provides a strong incentive for businesses to expand continuously. A growing firm can keep postponing payment of its deferred taxes since tax benefits from new investments offset old tax liabilities which come due, a fact confirmed in the National Research Council's 1980 report "Energy Taxation: An Analysis of Selected Taxes." The current A CRS system results in "misallocation of resources, according to Professor Fullerton "Special investment tax credits and accel erated depreciation allowances serve to push economically inferior investment projects ahead of more productive investment projects," he observes. IT Ca. The ITC provides utilities with 10 percent of the capital required for building new plant & The National Research Council report explains how the ITC distorts planning by electric utilities: (T)he investment tax credit makes the high capital cost option cheaper to investors than is justified by the resources actually expended. It thus tends to induce choices that absorb more capital in generating the same amount of electricity than would be the case without the tax credit. (p. 80) Even if there were economic justification for capital subsidies such as the ITC and ACRS, there is little reason for the Treasury to incur such immense tax expenditures for regulated utilities. As former House Ways and Means Committee Chair Al Ullman stated in 1962: In view of the fact that utilities are regulated monopolies with If indeed these capital formation incentives are effective, they encourage utilities to make unnecessary investments, to the detriment of our economy and the environment. Expensing of Construction-period Interest. As explained on page 3, electric utilities save more than $4 billion annually from this provision, the second highest tax subsidy they receive, Pollution Control Bonds and Other IDBs. Electric utilities issued at least $4.8 billion in pollution control bonds last year, which provided more than 30 percent of the industry's external capital for new investment. Pollution control bonds have typically been used to finance 10-20 percent of the cost of a coal-fired plant, less for a nuclear plant. A recent ruling by the Internal Revenue Service, however, enables utilities to finance an even larger portion of their nuclear investments with tax-exempt bonds. Filings by Georgia Power Co, suggest the company plans to finance at least 27 percent of its share of the Vogtle nuclear plant with tax-exempt bonds. The utility would thus save about $1 billion in interest costs over the plant's lifetime Another provision allows utilities to use tax-exempt industrial development bonds to finance construction of facilities which will provide electricity or gas to not more than two counties. This provision has enabled a few utilities, such as Hawaiian Electric Co., to finance entire new plant s with tax-exempt bonds. In 1984, Congress stretched this provision further to allow Long Island Lighting Co. to use tax-exempt bonds to refinance the debt on its troubled Shoreham nuclear plant. Impact of Tax Subsidies on Utility Investment. Federal tax subsidies contribute to the poor planning and wasteful investments which have characterized the electric utility industry in recent years. After more than a de ca de of over building, the utility industry has a generating reserve margin of 36 percent -- about twice what regulators recommend. Because they overestimated power demands and underestimated construction costs, utilities have been forced to abandon more than $25 billion invested in nuclear plants which were never completed Construction is continuing today on about 40 nuclear plant s which will produce power at rates far above the cost of alternatives. Without the massive federal tax subsidies for new investment, utilities would be forced to pursue more creative ways of meeting their customers' energy needs, such as load management and energy efficiency improvement & An official of Consolidated Edison Co. has stated that a loss of federal tax benefits for utilities would stimulate "less capital intensive forms of energy development" and that conservation and load shifting may become more appeal ing than new power plant construction. (Electric Utility Week Dec. 3, 1984) It is not unreasonable to conclude that without the generous federal tax subsidies it has received over the past few decades, today's electric utility industry would be very differ ent. CONCLUSION The current patchwork of energy tax subsidies plays havoc with rational energy policy, wasting both economic and natural resources. It prevent s individual decisions regarding energy production and use from efficiently allocating economic and natural resources. Further, it distorts the true environmental costs of resources, resulting in unnecessary environmental impacts. Treasury I would eliminate virtually all tax subsidies for energy, an important step toward creating a "level playing field" for energy investment & From an energy perspective, it provides the benchmark of tax reform. No other tax reform proposal is as comprehensive By contrast, Treasury II takes one step forward in removing some of the subsidies, but then takes a giant step back by tilting the playing field even more steeply against renewable energy resources. Its present form is unacceptable. At the very least, tax credits for renewables and conservation should be restored and tax lives should bear some relation to the expect ed life of an asset. Finally, if the tax code is to continue to be used to set energy policy, then it should be done on the basis of a careful examination of the broad range of issues relating to energy use and production Tax incentives should not run counter to principles of least-cost energy planning and efficient allocation of resources. |