Renewables avoid worst of tax reform proposals

The sector sees modest negative changes in the final bill after fears tax code changes could have set the industry back.

The final US tax bill passed by Congress on Tuesday assuaged the worst fears of the renewables sector as changes to the tax code that threatened to derail the sector were left out.

Renewables did not escape completely unscathed. The bill includes a base erosion anti-abuse tax, which complicates the use of tax credits crucial to renewables financing. Unlike an earlier version of the legislation passed by the Senate, however, the final bill allows business tax credits to offset 80 percent of the BEAT, softening what could have been a serious blow to the sector.

Two other changes that would have harmed renewables – one in the House bill and one in the Senate version – were scrapped altogether. The bill passed by the House of Representatives would have reduced the value of wind production tax credits and phased out a permanent 10 percent solar credit, with some changes retroactive.

The original Senate bill included an alternative minimum tax of 20 percent – the same as the corporate tax rate. This threatened to reduce the value of tax credits on which the industry depends. Had either of these changes become law, they would have been far more consequential than the BEAT provision.

“I am relieved relative to where [the tax bill] could have come,” Scott Brown, chief executive of New Hampshire-based renewables firm New Energy Capital, told Infrastructure Investor. “It will have only a minor negative impact on the industry, and developers should be able to structure around the changes in the tax code to continue to grow the industry.”

One change that will have a conflicting impact on the sector is the reduction of the corporate tax rate to 21 percent from 35 percent. Brown, whose firm focuses on solar projects, points to this reduction as a positive. He concluded that the rate reduction offsets the negative effect of the BEAT provision and makes the plan relatively neutral for the industry as a whole.

However, this rate reduction will also lower the value of renewables tax credits, according to an analysis by Fitch Ratings.

“Many US wind and solar projects are constructed using tax equity financing,” Fitch stated. “Lower taxes will lower the value of the tax credits and depreciation to investors, which will likely reduce the amount of tax equity available to finance new renewables projects.”