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Energy tax incentives and the alternative minimum tax.

Article Excerpt
INTRODUCTION

Energy-related subsidies in the federal tax system are under increasing scrutiny. Some note that the tax system provides large subsidies to oil and gas producers at a time when we should be reducing our consumption of fossil fuels. Others note the subsidies provided to renewable energy and raise concerns about the marginal impact of those subsidies at a time when oil prices exceed $100 per barrel.

Less clear is the ability of firms to take advantage of these subsidies. In particular, firms can only utilize energy-related tax credits if they have sufficient tax liability against which the credits may be offset. In addition, the corporate Alternative Minimum Tax (AMT) can reduce the value of preferential depreciation rates for energy-related capital investment and energy-related tax credits by deferring the time at which they may be enjoyed.

In this paper, we take a first look at limitations on the use of energy-related tax credits contained in the General Business Credit (GBC) due to limitations within the regular corporate income tax as well as the corporate AMT. We find that between 2000 and 2005, the ability of corporations to take energy-related tax credits was significantly curtailed by limitations in the regular tax on the use of GBCs. We find that the corporate AMT has a less pronounced impact on the ability of firms to use these credits, though the impact is not trivial. Finally, we provide some illustrative calculations to demonstrate how the corporate AMT can lead to very different levelized costs of producing electricity from a wind power project. Among other things, these calculations make clear the complexity of measuring the impact of the corporate AMT on the profitability of energy-related investments.

BACKGROUND

The various energy-related tax credits in the U.S. tax code are designed to encourage our use of renewable energy sources and to stimulate domestic production of conventional energy sources. While the two goals might appear contradictory, they arise from differing energy policy objectives. One objective is to reduce our use of energy sources that create negative environmental and other externalities. Renewable electricity production tax credits (REPTC) have been promoted on the grounds that they provide an alternative to the use of fossil fuels in the production of electricity. (1) This may contribute to a reduction in S[O.sub.2], N[O.sub.x], and other emissions. (2) It also contributes to a reduction in C[O.sub.2] emissions, of particular concern for climate change.

A second policy goal is to increase energy security. While an imprecisely defined concept, it generally is manifested by a concern with reducing oil consumption and diversifying energy supplies. Tax credits for enhanced oil recovery (EOR) contribute to a diversification of oil supply even if they do not contribute to a reduced reliance on oil in the United States. (3)

Table 1 lists the most important energy related tax expenditures in the federal budget and their associated revenue loss. Subsidies for alcohol and biodiesel fuels are the largest tax expenditure ($10,840 million from 2009 through 2013), with biodiesel subsidies accounting for less than one percent of this figure ($80 million from 2009 through 2013). Most of the revenue loss associated with alcohol fuels results in a reduction in excise tax receipts ($10,630 million from 2009 through 2013) with the remainder arising from the alcohol fuel income tax credit and the tax credit for small ethanol producers. The second largest single tax expenditure is the new technology credit ($5,010 million from 2009 through 2013). This tax expenditure includes the REPTC as well as an investment tax credit for solar and geothermal power.

We focus on the ability of firms to use their energy-related tax credits. Firms are limited in their use of credits for two basic reasons. First, they may not be earning enough positive income to take advantage of their credits. Only 53 percent of firms in 2005 had a positive net income. These firms accounted for over 90 percent of total corporate assets. Second, they may be limited in their use of these credits by the Alternative Minimum Tax. Less than one percent of firms were affected by the corporate AMT, either through limits on the use of tax credits or direct AMT payments, in 2005. These firms, however, accounted for 23 percent of corporate assets. (4)

The interaction between the corporate AMT and energy subsidies has not been explored before and so we pay particular attention to this policy. The corporate AMT is designed to ensure that a taxpayer's use of certain deductions and credits does not allow the taxpayer to avoid significant tax liability. In brief, the corporate AMT requires the filer to recompute taxable income after disallowing various preferences and adjustments. This gives rise to alternative minimum taxable income which--after a possible exemption of income, depending on the level of alternative minimum taxable income--is taxed at a 20 percent rate. This tentative minimum tax (TMT) is compared to the regular tax liability and the taxpayer pays whichever is larger. The corporate AMT may be credited against future regular tax liability, but the credits may not be used to reduce regular tax liability below the tentative minimum tax. As a result, the corporate AMT largely results in the deferral, but not elimination, of certain tax benefits.

Under the corporate AMT, firms begin with taxable income before net operating loss deductions and add back in a number of preferences and adjustments to compute alternative maximum taxable income. These adjustments include using less generous depreciation schedules and tax-exempt interest income from specified private activity bonds, among other things. An exemption of up to $40,000 is allowed (reduced for larger amounts of AMTI) and a 20 percent marginal tax rate applied. After subtracting allowable foreign tax credits, the tentative minimum tax is obtained. If this amount is greater than the regular tax liability, the corporation must pay the difference as an AMT.

Note that the tentative minimum tax is compared to the regular tax liability before taking all but foreign tax and possessions tax credits. Thus, a corporation may not be subject to the alternative minimum tax but could still be affected by it through a disallowance of some of its tax credits in the current year. To illustrate with a simple example, a firm has a regular tax liability before tax credits of 100. Its tentative minimum tax is 95. Therefore, it need not pay an AMT tax. But it can only use a maximum of five in tax credits to offset its regular tax liability. A firm with 15 in current year tax credits would have to carry forward (or back) ten of the current year credits to avoid its after--credit tax liability from following below its TMT. This description of the corporate AMT is necessarily brief. For more information, see Lyon (1997) and Carlson (2005). We turn next to explore what energy-related tax credits are used by corporations.

INFORMATION FROM THE CORPORATE TAX DATA

In this section we analyze the most important energy tax credits taken by corporations. Table 2 provides information on the aggregate credits for four of the most significant energy tax credits received by corporations. (5)

The nonconventional source fuel credit (NSFC) was first established by the Windfall Profit Tax of 1980 (PL 96-223) under Section 29 of the tax code. The section provides for a $3.00 per barrel of oil-equivalent production tax credit for alternative fuels (indexed in 1979 dollars and worth $6.79 in 2005). The credit phases out for oil prices above $23.50 in 1979 dollars ($53.20 in 2005). Originally benefitting shale and tar sand oil, synthetic fuels from coal, landfill gas and coalbed methane, the major recipient of the credit was coalbed methane until its eligibility for the credit ended in 2002....