The Trump administration released a broad outline of their tax reform proposal this week. The Trump plan like the House tax reform proposal, includes proposals that would have a significant impact on the energy sector.
The big news in the Trump Plan is the reduction in the corporate tax rate from 36.9 % to 15%, and that it will also apply to pass-through entities. This is a major change for the energy sector, as many financing and business structures in the sector depend upon pass-through entities where the taxes are not paid by the business itself, but are passed through to their owners or “partners” individual taxes. These include partnerships, limited liability corporations (LLC), and Master Limited Partnerships (MLP) to name a few. The Trump proposal would impose a new tax rate of 15% on pass-through entities, unlike the House tax plan, which caps the rate paid on that income to 25%. For MLPs in particular, this much lower rate would be very beneficial. The use of the MLP structure is limited under current law to transportation, processing, storage, and production of natural resources and minerals, so this is of particular interest to the midstream sector. In addition, there is a movement in Congress to expand the MLP structure to allow its use by the renewable sector. This Trump proposal would enhance an already-superior tax structure enjoyed by MLPs.
Other elements of the Trump plan shares many similarities with the plan released by House Republicans last year. House Ways and Means Chairman Brady says they are 80 percent similar. A difference is that it does not include the border adjustment tax, which is of great concern to the refining sector that imports oil. But it still includes a placeholder for moving our tax system to a territorial one. That might mean another version of the BAT, but it remains to be seen. It would also provide for a 10% tax rate for mandatory repatriation of foreign income earned to bring it back to the U.S.
While neither plan specifically mention depletion allowances and other special tax incentives for the energy industry, many believe that it would in fact repeal it in its current form. The loss of the depletion allowance would have a huge impact on the oil and gas and mining sectors, as they rely on it to recover capital investment. Loss of the tax credits for the renewable sector would also have a similar significant impact.
The House plan also makes significant changes to the deduction used by energy companies for interest expenses in acquiring assets used in production. In exchange for the immediate expensing of assets mentioned above, companies would only be allowed to deduct the net interest expense. This would have a significant effect on the fossil fuel industry and the power and utility sector, especially those that are highly leveraged. The Trump plan is largely silent on these issues.
The timeline for enactment of tax reform continues to be pushed back. While both the Speaker and the Administration have had a goal of completion by the August congressional recess, House Ways and Means Chairman Brady said that he was focused on working with the President and the Senate to pass a bill this year. And he pointed out that this was the first time since, President Reagan that a President has put personal capital behind getting tax reform done.
To view a side-by-side comparison of the broad outlines issued to date, click here.
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ENERGY REGULATORY NEWS
STATE ENERGY NEWS
ENERGY POLICY NEWS
ENERGY MARKET NEWS
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GLOBAL ENERGY NEWS
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ENERGY TAX NEWS
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RENWEABLE ENERGY NEWS
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FROM THE CHART ROOM
Today Solar Has More Jobs Than Coal
President Trump has promised to revive the coal industry and double down on fossil fuels, creating “so many energy jobs,” but he has not focused on the increasingly important role of renewable power in America’s energy economy. Last year, the solar industry employed many more Americans than coal, while wind power topped 100,000 jobs. Those numbers come from a Department of Energy report published in January by the Obama administration that provides the most complete picture available of American energy employment. In 2016, 1.9 million Americans were employed in electric power generation, mining and other fuel extraction activities, according to the report – a field we’ll call power creation for short. More than 373,000 Americans worked part or full time in solar energy, and just over 260,000 of them – or about 70 percent – spent a majority of their time on solar projects. Most solar energy jobs were in installation, construction and manufacturing, as the relatively new industry continued to add capacity. Solar power still generated a small share of United States energy output last year. The coal industry, which has shed jobs since 2012, primarily due to competition from cheap natural gas, employed just over 160,000 workers nationwide. About 54,000 coal jobs were in mining. It’s important to note that power creation isn’t the only source of energy employment. The Energy Department report found another 2.3 million jobs in energy transmission, storage and distribution, a number that includes powerline and pipeline workers and more than 900,000 retail jobs, such as gas station workers and fuel dealers. If non-traditional energy workers are included in the mix – those involved in manufacturing and installing energy-efficient products – the total number of energy-related jobs swells to 6.4 million. Read more on New York Times.
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