How President-elect Trump’s incoming administration might affect tax guidance and what grenades, if any, a Republican-held Congress might lob at the Inflation Reduction Act energy credits are looming questions for tax practitioners. What the administration and Congress could do and what they’re likely to do are two different things. We have no crystal ball, but we do have four years of observations from the prior Trump administration.
One thing is fairly certain: There will be plenty of work for readers in the next four years, and especially for the rest of this year for those facilitating energy credit transactions. Most of the IRA probably isn’t going anywhere, despite its costs and the impending expiration of many provisions of the Tax Cuts and Jobs Act, which Republicans in Congress and Trump would like to renew.
Battery Low?
The BBC’s Top Gear was channeling The Onion, but its satire writers identified a likely target for possible elimination in the IRA credits when they wrote: “All Electric Cars in the US to Be Retrofitted With V8s.” The “unused batteries will be repurposed into massive monster truck ramps,” explained the subheading. Section 30D might see some legislative changes, but whether the battery life of the electric vehicle credits has really reached its end is debatable. Some trimming around the credit’s edges might be the likeliest outcome for now.
The history of the EV credits is potentially instructive. Individual consumer credits have largely had bipartisan support, although over time the consensus has started to crack along party lines. The alternative fuel vehicle credit of the early 2000s gave taxpayers a deduction of up to $2,000 for an alternative fuel vehicle or a hybrid.
The Energy Policy Act of 2005 replaced the deduction with a credit of up to $4,000. It passed the Senate 74 to 26 and the House 275 to 156, with then-Sen. Joe Biden voting no and Sen. John Thune, R-S.D., voting yes.
Section 30D was added by the Energy Improvement and Extension Act of 2008 with nearly all senators voting in favor, including Thune, and the House mostly split along party lines. The credit was raised to $7,500, with a phaseout after a manufacturer sold 250,000 vehicles. The phaseout was intended to be the point at which alternatives to the combustion engine had reached commercial viability. But the credit didn’t end; instead, Congress expanded it.
The IRA, which passed on a hard party-line vote, overhauled section 30D to add income thresholds for car buyers, manufacturers’ suggested retail price caps, and production requirements in North America. Half of the credit is now dependent on meeting the critical minerals requirement, and the other half, the battery components requirement. The IRA’s updates also switched out the term “new qualified plug-in electric drive motor vehicle” for “new clean vehicle” and increased the minimum battery capacity requirement from four to seven kilowatt-hours. The vehicles-sold limitation was removed.
The presidential transition team is reportedly looking at ways to eliminate section 30D. Nothing has been said about the other EV-related credits, such as the alternative fuel refueling property credit, the credit for previously owned clean vehicles, and the credit for commercially owned clean vehicles.
The Joint Committee on Taxation’s updated 10-year cost estimates in April 2024 for the clean vehicle credits included only the refueling property credit, at $1.3 billion, a drop from the $1.7 billion estimated in 2022 (JCX-7-23). The 2022 estimate for all of the clean vehicle changes in the IRA was $14.2 billion (JCX-18-22).
Legislators have already proposed changes to section 30D. In the End Chinese Dominance of Electric Vehicles in America Act of 2024 (H.R. 7980), House Ways and Means Committee member Carol D. Miller, R-W.Va., proposed changing the excluded entities in section 30D(d)(7) to strengthen the foreign entity of concern rules. The JCT estimated that the effects of the bill would be $660 million between 2024 and 2034.
And now for the obligatory Elon Musk mention: The Tesla CEO and prospective Department of Government Efficiency co-leader has suggested that eliminating the EV credits would help his company, but he has a history of opposition to the IRA’s version of section 30D.
In December 2021, when asked about the plan to subsidize EVs and charging station production through credits, Musk responded: “I’m literally saying get rid of all subsidies.”
Planning for Transition
Practitioners working with energy tax credits have become comfortable with uncertainty, said Jenny Speck of Vinson & Elkins LLP. That’s by necessity.
“Many of the credits that were enhanced in the IRA have been around for decades,” she noted, but many survived over the years through a series of last-minute or even post-expiration retroactive extensions by Congress.
The prior Trump administration did not remove them. In fact, the Bipartisan Budget Act of 2018 enhanced the credit amount for carbon sequestration in section 45Q by expanding the scope of eligible taxpayers and increasing the credit amount. For various reasons, it seems likely that Congress will look for less dramatic changes to the energy tax credits than full repeal.
The transition raises the potential that lawmakers might scale back eligibility for some credits or the amount of credits, Speck said. But there is also the possibility that the new Congress will instead use the opportunity to ensure that the investments are directed where legislators intend, she said.
Speck said she hasn’t seen a slowdown in stakeholder interest in selling or purchasing credits. The market has been on a solid, upward trajectory as sellers and buyers become acclimated to the transferability regime, and that seems likely to continue.
There are some steps that taxpayers should consider in light of the calendar and the administration transition. Speck noted that some credits sunset this year and the required domestic content percentage increases for bonus credits in the new year.
Accordingly, developers might want to start construction by the end of the year, she said. Credit buyers should ensure that they have clear change-in-law provisions in their contracts, particularly if credits will be procured in the future, said Andy Moon of Reunion, an energy tax credit marketplace.
Advanced Manufacturing Changes?
Treasury and the IRS released the final regulations (T.D. 10010) for the section 45X advanced manufacturing production tax credit in October, but there could be some changes in store from the new Congress.
The likeliest is the addition of a rule blocking credits for companies owned by entities in specific foreign countries. That might not have a large revenue effect, but it would suit political objectives. Many Energy Department loan programs already have restricted ownership requirements, so this type of change has a blueprint.
Folks, This Ain’t Normal
Does it portend anything for tax that Joel Salatin is rumored to be slated for a position at the Department of Agriculture? For readers who have never contemplated owning backyard chickens, Salatin is a farmer in Virginia who writes books (including the one referenced in the heading above) that remind his readers that it’s best to work with nature rather than against it.
Salatin’s livestock fertilizes his pastures, and he has given tours of his farm to showcase his environmental and agricultural practices. One can make a reasonably good guess about his opinion of biogas derived from larger dairy operations.
Even if some incoming appointees might disfavor certain forms of biogas, targeting those forms would require Congress to act, because the IRA put them into section 48.
There were bipartisan efforts to include qualified biogas property in 2021 when Thune joined then-Sen. Sherrod Brown, an Ohio Democrat, to propose the Agriculture Environmental Stewardship Act of 2021. The House companion bill was sponsored by then-Ways and Means members Ron Kind, a Wisconsin Democrat, and Tom Reed, a New York Republican. Ways and Means Committee member Mike Thompson, D-Cal., also included biogas in the Growing Renewable Energy and Efficiency Now (GREEN) Act of 2021, but that had no Republican cosponsors.
Paring back the credits for biogas might be unpopular even among Republicans, because of where most of the methane for biogas comes from — dairy operations and waste facilities in rural areas — and the oil and gas industry’s involvement in renewable natural gas.
Tariffs
Trump likes tariffs as domestic protection measures. In his discursive interview with podcast host Joe Rogan, he cited as an example of his approach a planned automobile factory in Mexico owned by a Chinese company that would sell cars into the United States.
“I said if I’m there when I’m president, I will put 100 or 200 percent tariffs on every car; they’ll be unsalable in the United States. They just announced they’re not going to build the plant,” he said. “To me, the most beautiful word — and I’ve said this the last couple of weeks — in the dictionary today is the word ‘tariff.’”
Rogan challenged him on whether he’d actually try to eliminate income taxes and replace them with tariffs. Trump shrugged. “Yeah, sure, why not,” he replied, and then cited the tariffs supported by President William McKinley.
“Try” is the operative word in that response. Trump knows it’s far from likely, which is why the transition team and Republicans in Congress are spending time on the TCJA renewal instead. There will almost certainly be tariff increases, because Congress ceded its power to set tariff rates to the president long ago.
In 2018 the Trump administration imposed a 30 percent tariff that declined by 5 percent annually over four years on solar cells and modules after the U.S. International Trade Commission found that increased foreign imports of solar panels were causing “serious injury” to domestic manufacturers. Cells that were less than 2.5 gigawatts were exempt.
The consternation about tariffs in the energy sector might be exaggerated. The Biden administration on May 14 announced an increase in tariffs on Chinese EVs from 25 percent to 100 percent. The tariffs on lithium-ion EV batteries and battery parts were slated to increase from 7.5 percent to 25 percent in 2024. On May 16 the administration announced that it had doubled the tariff rate on Chinese solar cells and models, from 25 percent to 50 percent.
Still, the Rhodium Group and MIT’s Center for Energy and Environmental Policy Research concluded in a report that “if all announced and under-construction battery manufacturing facilities come online as scheduled and produce at expected volumes, the U.S. will produce more battery cells and modules than what domestic demand will consume by 2030.”
Domestic EV manufacturing is expected to exceed domestic demand by 2027, if all the facilities that are operating, under construction, and announced are completed, but it could fall short of projected demand by 2030, according to the report.
Looking Ahead
The inherent uncertainty in the transition could unsettle the market for buying and selling tax credits. But history suggests that the energy credits are quite durable.
Wind and solar credits have survived almost 20 years of extender legislation packages. Moon said that tax equity participants have long questioned whether it was worth the effort to plan tax equity transactions because the ability to do them could be revoked, but they persist. And ultimately, clean energy enjoys high levels of popularity, he said.
The potential uncertainty is unlikely to dampen demand for credits in the near term. Moon said that Reunion expects to remain busy facilitating transfers into 2025.
“There is a lot of activity, particularly from buyers looking to lock in 2024 and 2025 tax credits before any potential changes,” he said. He added that it is important for the new administration to provide policy clarity as quickly as possible.
“Having certainty one way or the other is most helpful,” Moon said. Any statutory changes Congress pursues will take time to undergo the legislative process, and will almost certainly not be retroactive.
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