David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: clean energy conundrum.

The need for policies to confront environmental concerns exists without regard to the legislative calendar. But as the Build Back Better Act has remained stalled, some still hold out hope for legislation to begin addressing climate change this year. So, what proposals and incentives are still on the table? And how would they affect companies and industries?

Joining me now to talk more about this is Tax Notes contributing editor Marie Sapirie. Marie, welcome back to the podcast.

Marie Sapirie: Thanks for having me.

David D. Stewart: Now, you recently spoke with a couple of guests about this. Could you tell us about them?

Marie Sapirie: I spoke with Nicole Elliot and Beth Viola, both of Holland & Knight. Both Nicole and Beth held high level positions in the federal government before joining the firm. Nicole was a senior advisor to the IRS commissioner, where she was the lead executive responsible for overseeing the implementation of the Affordable Care Act. And she was also a litigator at the Tax Division of the Department of Justice. Beth is the senior policy advisor at Holland & Knight, where she is part of the leadership of the Energy and Natural Resources Industry Sector group. Previously, she was the senior advisor to the White House Council on Environmental Quality, and Chief Environmental Advisor to the Vice President.

David D. Stewart: So, what sort of issues did you talk about?

Marie Sapirie: We discussed the clean energy tax proposals that were introduced in the Build Back Better legislation last year, and the prospects for an energy bill over the next few months.

David D. Stewart: All right. And before we get started, I should note that we're still recording this podcast remotely. So please, excuse any sound issues you may hear. All right, let's go to that interview.

Marie Sapirie: Thank you, Nicole and Beth, for joining me today to discuss the clean energy tax proposals that were introduced in Congress last year. And that might be on the agenda again later this year.

Beth Viola: Thank you so much for having us.

Marie Sapirie: So, as a brief introduction, there was a large amount of legislative activity on clean energy tax credits last year, but no bills that made it to the president's [Joe Biden] desk. Congress had hearings and introduced proposals on renewable energy in the first half of 2021, and then Treasury's Green Book, in May, included plans to expand existing energy tax credits and create new ones. And then the budget reconciliation bill, called the Build Back Better Act, passed the House in November with a subtitle devoted to green energy. Then in December, the Senate Finance Committee Chair, Senator Ron Wyden (D-Ore.), released an updated version of that bill that also included clean energy credits.

Would you take us through the highlights of the clean energy tax proposals in Build Back Better, in the House and Senate versions?

Beth Viola: Sure. Happily. Well, first I think it's really important to take a step back and recognize that then former Vice President Biden and the Democrats ran in 2020 on the promise that you could reinvigorate our nation by investing in infrastructure and creating lots of good high paying jobs while making the transition to a low carbon economy.

It's important to note that, in addition to the conversations going on around the Build Back Better legislation, that in 2021, the bipartisan Infrastructure and Jobs Act passed in November of 2021. And that that bill was intended to provide unprecedented amounts of money to invigorate our economy. But it was very much designed to be complimentary to what we're talking about today on the tax incentives for Build Back Better as it relates to clean energy infrastructure.

So, as you noted, the House of Representatives did pass Build Back Better in 2021 with a very large price tag associated with it. Currently that bill is sitting over in the Senate and it has been for some time. And there's still a lot of angst around it, as it relates to trying to get something done this year. Senator [Joe] Manchin (D-W.Va.), as you may know, was instrumental in saying, "We are not going to move Build Back Better as the House passed it," because of its very large price tag and his concerns around the impact to our nation's debt.

But I do think that there seems to be some growing momentum around trying to get some sort of package, "reconstituted Build Back Better" as I call it, done in the not too distant future with a very significant clean energy title associated with it. So, I think there are a lot of things that have played into why we haven't seen more movement this year to date, primarily just we had to get a budget done this year.

We've seen what's happening globally, especially the situation in Ukraine. I do think we're starting to see, as I said, more momentum around trying to reinvigorate the tax title for clean energy. There's really some amazing provisions in there. And you've got industry that is incredibly eager to see a lot of this passed, both in terms of just the renewable industry, but as well as innovative and conventional energy players who are trying to also make the investments to a low-carbon economy.

So, at this point in terms of timing, we're hoping that the Senate will try to get some sort of agreement in place on whatever reconstituted Build Back Better legislation, at least in terms of a framework that could potentially be done, ideally by Memorial Day. Because they really, from a political perspective, the Democrats really need to try to get a package done and passed, and signed by the president before they go on the August recess. But the reality is they have until the end of September in order to use the reconciliation instructions that they have to try to pass this legislation.

Nicole Elliott: And of course, if they fail at this, that is including the tax provisions that we're going to talk about today in Build Back Better or its successor, there is a possibility that we will see tax extenders. In terms of different vehicles, a lot of tax provisions have expired because Congress failed to act at the end of last year. In terms of vehicles, that could be another vehicle. But, of course, to do that, we would need bipartisan support. And I think if we are in that mode where Build Back Better or its successor fails, the tax extenders package — if that is the option and that is the vehicle — will be much scaled down to what we see and the exciting things we see in Build Back Better.

Marie Sapirie: In Build Back Better there were some significant innovations to the energy credits that might come up in a future package. Three of those are the option for direct payment of the credit amount, a bonus credit for meeting the wage and apprenticeship requirements, and another bonus credit for using domestically produced steel, iron, and manufactured products. And there was also a previous proposal to boost nascent clean energy technologies that didn't make it into Build Back Better.

Would you tell us how those proposals work and what we should look for if Congress picks them up again in the near future?

Nicole Elliott: So, happy to. So, one of the exciting things in Build Back Better is that there is a provision for what is called "direct pay." And direct pay is really a term of art. It treats tax credits as if it was a payment of tax. So, if the taxpayer, of course, if you overpay your tax, you're entitled to cash in the form of a refund. And this concept of direct pay was really an outcrop from a 2009 law called the American Recovery Reinvestment Act. And instead of tax credits, it created a grant program. It's referred to as the Section 1603 Grant Program. And that was really established and was necessary back in 2009 because it was perceived that the tax equity market was really weak. And tax equity markets exist when a taxpayer's entitled to a credit, for example a green energy credit, but really needs to monetize those tax credits sooner or may not have enough tax burden.

So really, while these tax credits that exist are great, there are certain taxpayers who just simply can't take advantage of them. So, the way to get around that is the tax equity market, which has investors come in and provide capital and who can use the tax benefits. And that's usually, as we've seen in the space: banks, financial companies, insurance companies.

But the 1603 program, which was enacted as part of law in 2009, existed for a couple years and it got, I think mixed reviews. It was a program that required a lot of upfront work, work formulated by the Treasury Department. But I think the concept behind it was very favorable, which is: how do we deliver tax benefits directly to the renewable energy sector?

And thus, this is why we have direct pay. A lot of the tax credits in BBB, Build Back Better, as was passed by the House included this option, this ability to elect direct pay.

I counted 12 of them that would be the ability to do direct pay. And this is really a massive undertaking from a tax administrative standpoint, with millions of dollars going out the door. So, a very exciting part of Build Back Better is direct pay. But I would say it's not without questions about how this is going to be administered.

The Build Back Better Act gives the Internal Revenue Service, who would be providing the direct payments, 270 days to get the system up and running. And we really don't know how that process would work. We really don't have a good template for how something like this should be done. But clearly I think it could require, for example, companies to register, provide a lot of information upfront. And so, it's a very exciting part of Build Back Better, the fact that so many of these are direct pay options, but inevitably there will be some bumps in the road in how you get these dollars out the door.

Marie Sapirie: Would you like to talk about the bonus credits as well, for the wage and apprenticeship requirements, and the domestic production?

Nicole Elliott: Yeah, I can take a stab at that. So, that was another interesting part of Build Back Better. There was a big push in the clean energy tax credit space to tie those credits to labor requirements and United States content requirements. And what the Build Back Better Act that was passed out of the House, and in versions of the Senate, it really creates a two tiered structure.

So, you kind of get a base rate on a tax credit, and then there's a bonus if these are met. So, they're not technically barriers to getting this credit, but they are enhanced in a way that taxpayers will really be trying to meet the labor requirements and the U.S. content. But it will add a lot of come complexity and a lot of cost, I think, as we think through how are we going to meet these requirements as taxpayers.

But to just give you an example. So, the production tax credit under Build Back Better, which has existed in the code for a long time, but would be extended and modified by Build Back Better. It's a percentage, it's a credit based on energy created. It would be .3 cents per kilowatt under the regular base credit scenario, but it comes up five times that amount if you meet the labor and the U.S. content requirement. Similarly under [Section] 45Q it goes from a credit — 45Q is the carbon sequestration credit— so the base credit amount is $17 per metric ton, but if you meet the labor and the content requirements, it goes up from $17 to $85.

In some ways people are referring to it as a bonus credit. But the numbers are such that I think the word 'bonus' is a bit misleading because again, taxpayers are really going to want to try to ensure that they meet and get these higher amounts out of the credit.

Beth Viola: I think it's important to note, too, why they did the structure this way. They created this "bonus structure" because what they really wanted to do was ensure that labor jobs, prevailing wage were included and that domestic content, we start on-shoring and creating our own content here in the United States. And so, they did it in a way that would allow you to deal with the parliamentarian rules in the Senate, but would ensure that if you want the full credit, you're going to have to meet these requirements. So, there does need to be some 'skin in the game' from companies to meet these standards.

Marie Sapirie: So, you brought up the parliamentarian and that's in the context of the budget reconciliation process. Would you expect the formulation of the credits to change if we're outside of the budget reconciliation process? Or what should we look for as we're going forward?

Nicole Elliott: I would say labor requirements and buy American, the importance of those things are not new. And so, they are underpinnings, for example, in a lot of government contracting. I would suspect if you are talking to Democrats, this would be something that's important full stop. If we are in the mode where we are talking about what of these credits survive in a tax extender package or a bipartisan, obviously the calculation changes.

And I think this was a nifty way to get around the parliamentarian rules. I would say that we still haven't gone through the full parliamentarian rules on this act, and so whether this works, I think it was a good way to do that. But all of this is subject to really what happens with Build Back Better.

Marie Sapirie: On that topic of how these provisions might eventually pass this year, what are some of the possibilities for upcoming legislation? And in particular, how should we expect to see it make its way through the Senate?

Beth Viola: Well, as I said earlier, I think that there are conversations happening quietly with some leaders in the Senate with the White House, with Majority Leader [Chuck] Schumer (D-N.Y.), and trying to figure out — and especially with obviously with Senator Wyden on this package — that they are going to try really hard to see if they can't reach some agreement on what the outline of a reconstituted Build Back Better would look like.

This is really the crucial time. We have five weeks of work period where Congress is in session until the Memorial Day break. And so, they've got to really reach some agreement in the coming weeks and make some progress, so that then they can get the legislation rewritten, if they need to, and try to get it passed through the Senate. And then of course, it's going to still need to go back to the House.

Marie Sapirie: Given that there's some uncertainty about when and how the expansion of the credits might occur, how is the industry handling that and preparing for the possible passage of new incentives?

Nicole Elliott: Well, just as a preliminary matter, I would say that the tax provisions and the tax credits that are in Build Back Better, as currently drafted, would be transformative. There is a lot in here about working, enhancing, extending, modifying existing credits that have been really important, like production tax credit, investment tax credit, carbon sequestration. But there are also a host of new tax credits aimed at clean hydrogen, for example, or sustainable aviation fuel. So, I think the overall sense is that this would be just a sea of change in terms of promoting green energy.

Beth Viola: And I think, to Nicole's point, I mean, I think overall industry, for the most part, whether you're talking about those in the conventional industry side who are excited about things like the hydrogen incentive or the sustainable aviation fuel credit or the renewable guys, overwhelmingly people in the industry are excited about trying to have some certainty around these credits. The idea that they would potentially exist for 10 years is something that industry has been wanting. As opposed to this year to year tax extender game that people have had to play.

And I think for a lot of companies, especially with the direct pay incentive, for them it's going to allow them to deploy technology, in a way, much more quickly than they would be if they did a traditional tax incentive. So, I think there's just a lot of enthusiasm.

I will say, there's at the same time, there is some continued concern about things like the apprenticeship requirements with prevailing wage and the labor requirements, just to ensure they have the right labor force. And two, that I think the domestic content, we are struggling in this country to ensure that we can get the manufacturing in place that we need. And so, I think there just remains some concerns about if you are not able to meet those domestic content requirements, will there be some sort of waiver process that gets put into place?

Marie Sapirie: If Congress takes up these provisions again, are there any additions or revisions to the proposals that you might expect to see in the coming weeks or months?

Beth Viola: So, I think it's interesting we've started to see a little bit of interest in hearing, even from the Senate Finance Committee, about potential changes that industry may need. They've started to have some conversations again with key industry players.

I think one piece that was not included in the House Build Back Better version is the idea that you would also create a manufacturing tax incentive for offshore wind to supplement the existing manufacturing credits, and then same things, just some fixes of things that were excluded in the House version. Things like certain types of energy storage that were excluded in the House version, and trying to see if we can't get them fixed in the Senate version. So, we are seeing a willingness to have those conversations right now. So, we're kind of encouraged by that.

Nicole Elliott: And I would say this bill does kind of cover a lot of different bases in terms of clean energy. And it does also include residential and individual tax provisions. So, provisions about buying EV (electric vehicle) cars, including used cars, making improvements to your home that are energy efficient, or building new energy efficient homes. So, it's not just about industry, but there are also provisions in here that will help individual taxpayers.

Beth Viola: And like I said, I think there are a lot of companies that are in the conventional energy space that are trying to make investments. Let's just say an oil and gas company who wants to make the transition to become a carbon management company over a period of time. Things like the 45Q tax incentive, the hydrogen credit, the energy storage credit, those things are all going to be really crucial for them to make that investment and to make the transition to a low carbon economy.

Marie Sapirie: Well, thank you, Beth and Nicole, for joining the podcast today.

Beth Viola: Thank you so much for having us.

David D. Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Chris William Sanchirico questions if the global minimum tax should be country-by-country. Doug Borg and Ramon Camacho highlight issues the IRS is scrutinizing in its audit campaign of the Puerto Rico resident exemption. In Tax Notes State, Kathleen Wright reviews the lack of state response to the holding in Wynne. Craig Griffith summarizes recent West Virginia tax legislation. In Tax Notes International, Nana Ama Sarfo highlights some information gaps in the OECD's ongoing BEPS 2.0 process. Mari Takahashi assesses tax certainty effectiveness under pillar 1. In Featured Analysis, Marie Sapirie wonders if Congress will finally reform opportunity zones. And finally, on the Opinions page, Carrie Brandon Elliot writes that for the second year in a row theft of pandemic related enhanced unemployment benefits is the most scandalous fraud.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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