Energy Tax Implications of New Infrastructure and Tax Plans

Authors:  Greg Matlock,   Jeffrey G. Davis,   Daniel T. Kiely,  Warren S. Payne,  Shawn R. O’Brien

The American Jobs Plan

On March 31, 2021, the Biden administration released the American Jobs Plan (the “Infrastructure Plan”), which is a proposal that, if ultimately enacted, aims to modernize outdated infrastructure, create additional jobs and increase the United States’ global competitiveness. While much of the Infrastructure Plan describes areas in need of capital allocation, it contains numerous tax-related references, many of which could impact the energy industry.

• Encouraging investment in electric vehicles (“EVs”)

The Infrastructure Plan includes provisions to spur domestic supply chains and the production of raw materials to support American workers making batteries and EVs, and would provide consumers point-of-sale rebates and tax incentives to buy American-made EVs.

• Reenergizing America’s power infrastructure

Focusing on investments in the power grid, the Infrastructure Plan calls for a targeted investment tax credit to incentivize the buildout of at least 20 gigawatts of high-voltage capacity power lines. The Infrastructure Plan notes that doing so may immediately mobilize tens of billions in private capital.

• Modernizing power generation and clean electricity delivery

The Infrastructure Plan proposes a 10-year extension and phase down of an expanded direct-pay investment tax credit and production tax credit for clean energy generation and storage, all in an effort to modernize the power sector and to move toward 100-percent carbon pollution-free power by 2035.

• Plugging orphan oil-and-gas wells and cleaning up abandoned mines.

The Infrastructure Plan would commit an upfront $16 billion investment focused on plugging oil-and-gas wells and restoring and reclaiming abandoned coal, hardrock and uranium mines.

• Building next-generation industries (and expanding the Section 45Q tax credit)

Recognizing that the market-based shift toward cleaner energy projects presents significant opportunities, the Infrastructure Plan focuses on building next-generation, cleaner energy industries. For example, the Infrastructure Plan would pair an investment in 15 decarbonized hydrogen demonstration projects in distressed communities with a new production tax credit.

The Infrastructure Plan would also establish 10 pioneer carbon-capture retrofit projects for large steel, cement and chemical production facilities, as well as supporting large-scale sequestration efforts. In order to accelerate carbon capture efforts, the Infrastructure Plan would reform and expand the Section 45Q tax credit, making it direct pay and easier to use for hard-to-decarbonize industrial applications, direct air capture and retrofits of existing power plants.

In addition, the Infrastructure Plan contains a number of other recommendations that could indirectly benefit the energy sector, such as expanding the Section 48C tax credit.

Made in America Tax Plan

Alongside the Infrastructure Plan, the Biden administration released a Made in America Tax Plan (the “Tax Plan”), which is designed to reward US investment, eliminate profit shifting and ensure other nations will not gain a competitive edge by becoming tax havens. As many energy companies and investors operate or invest globally, many of the provisions of the Tax Plan could impact operations, investments and other strategic decisions, if such provisions were ultimately enacted into law.

The Tax Plan proposal includes, but is not limited to, the following:

• Increasing the corporate tax rate to 28 percent (from 21 percent under existing law);
• Creating a new, 15-percent minimum tax on corporation’s “book income” (i.e., the income corporations use to report profits to investors);
• Eliminating certain fossil fuel-related tax provisions (both domestic and foreign fossil fuel-related tax provisions) and restore payments into the Superfund Trust Fund to address polluting industries;
• Repealing the foreign derived intangible income deduction and using the revenue from such repeal to expand other research and development investment incentives;
• Increasing the global intangible low-tax income rate to 21 percent, calculating the rate on a country-by-country basis, and eliminating the 10-percent exemption based on foreign assets;
• Encouraging global adoption of minimum corporate taxes and denying deductions to foreign corporations on payments that could allow for profit to shift out of the United States if the foreign corporations are in a country that does not adopt a sufficient minimum tax;
• Preventing US corporations from inverting or claiming tax havens as their residence;
• Denying companies expense deductions for offshoring jobs and providing a tax credit to support the onshoring of jobs; and
• Increasing tax compliance enforcement efforts related to corporations—by ensuring that the US Internal Revenue Service has the requisite resources for tax law enforcement efforts.

Taxpayers should carefully monitor both the Infrastructure Plan and the Tax Plan and evaluate the impact that such plans may have on investments, operations and strategic decisions.