The tax code offers a powerful tool for incentivizing green choices.
In his March State of the Union address, President Joe Biden reaffirmed his commitment to cutting energy costs for families and combating climate change. The president correctly noted that changes to the U.S. tax code can be a valuable tool for achieving both goals.
“Let’s provide investments and tax credits to weatherize your homes and businesses to be energy efficient, and you get a tax credit; double America’s clean energy production in solar, wind and so much more,” he declared.
While the tax code might not be the first thing that comes to mind when one thinks of climate change, it remains one the most effective ways to incentivize behavior promoting energy efficiency and reducing greenhouse gas emissions.
Allowing public power utilities access to comparable tax incentives could serve as an excellent example of what Washington can accomplish when both parties work together to promote energy efficiency, lower energy costs for families and fight climate change.
Since the 1970s, Congress has encouraged certain forms of energy investments in the United States through federal tax incentives. In more recent years, Congress has expanded and extended such incentives to promote non-emitting energy resources as a means to address climate change. These tax expenditures have proven to be a powerful federal tool to promote wind, solar, geothermal and nuclear power development in the United States.
However, as is often the case with complex federal policy making, there is a rub.
These incentives are not available for public power utilities, because, as units of state and local government, they are exempt from federal taxation.
More than 2,000 publicly owned, not-for-profit electric utilities collectively provide cost-based electricity to 49 million Americans in 49 states. When you factor in rural electric co-ops—who also don’t have access to these incentives—we are talking about nearly one in three American electricity customers who are served by utilities that cannot claim energy tax credits.
As the president indicated in his address, there is an important national discussion underway about the most efficient ways to meet greenhouse gas reduction targets to counter the effects of climate change. Put plainly, that goal cannot be achieved in full measure by ignoring 30% of utilities and their more than 90 million customers.
If Congress is serious about achieving these important, marketwide policy objectives, then tax-based energy incentives should be drafted to accommodate tax-exempt entities, including public power utilities. In the same spirit, Congress should amend current law to allow the transfer of such tax benefits to others, to make tax credits “refundable” beyond the amount of taxes paid. It should also allow the issuance of special purpose municipal bonds to finance qualifying facilities.
Policymakers do not need to reinvent the wheel to turn these commonsense ideas into cost-saving realities.
Congress routinely seeks to incentivize certain types of energy investments and energy production. Sometimes this is done through direct federal grants, subsidized loans and loan guarantees, but the most significant incentives are provided through the federal tax code. According to the Joint Committee on Taxation’s estimate, energy-related tax expenditures were worth $11 billion to project developers in 2019 alone.
Giving public power utilities access to tax incentives makes those incentives fairer and more effective, ensuring that all utilities can embrace critical energy investments. Savings can then be passed on to customers in the form of lower utility bills or financing for additional money-saving investments.
Moreover, encouraging cities and towns to build and own their own power generation leads to local projects, local jobs and local control of the decision-making. This approach could complement and augment the economic benefits of the $1.2 trillion Infrastructure Investment and Jobs Act passed into law last year, notably the $65 billion allocated for electric and grid infrastructure.
Allowing public power access to comparable incentives represents a bipartisan step forward, which will benefit both the economy and the environment.
Joy Ditto is the President and CEO of the American Public Power Association.