With the election of President Trump at the end of 2016 came concern regarding tax reform and its potential impact on the solar industry. A massive overhaul of the tax code could mean doing away with the solar Investment Tax Credit (ITC), which was recently extended at the end of 2015 – though many consider this fate unlikely. However, even a modest decrease in the corporate tax rate will affect current deal economics and mean less tax equity available in the market. In case you missed it, Sol Systems’ CEO Yuri Horwitz discussed this in January’s edition of SOURCE. Put simply, if the tax rate for investors such as banks, insurance companies, and Fortune 100 corporates that utilize their tax liability to invest in solar assets shrinks, there could be less capital available to invest in solar, and the value of depreciation benefits of those investments will shrink as well.
Since the expiration of the 1603 cash grant, the availability of tax equity has consistently been a limiting factor in solar deployment. In January of 2016, after the ITC extension, we estimated about $10 billion in tax equity would be needed to fuel solar growth over the next five to seven years. However, the potential for tax cuts under the new administration has begun to raise questions about how much tax appetite potential investors will have. The corporate tax rate is currently set at 35%, but discussed tax cuts could lower it to 20% under this administration. If this were to occur, the tax appetite for the proverbial tax equity pie could be greatly reduced.
Another issue embedded in the tax reform discussion is the controversial Border Adjustment Tax (BAT). This tax would give tax breaks for exports and remove existing tax breaks for imports. Though the BAT could be a long shot, if enacted, it could raise prices of solar equipment from rest-of-world manufacturers.
As the Trump administration hits its 100-day mark in the next two weeks, how real are these fears? Since we last wrote about tax reform, Congress and the administration failed to pass the healthcare bill. Here are some thoughts on the likelihood of tax reform and the timing of tax reform.
Time Is on Our Side
Tax reform is an extensive undertaking for the federal government, even when one party controls the White House and Congress. The last time taxes were fully reformed and corporate tax rates cut was in 1986 under the Reagan administration, and it took years to negotiate. According to a CNBC interview with Secretary Mnuchin, he and President Trump are aiming to have a comprehensive tax reform bill in front of Congress before August recess at the earliest, meaning negotiations won’t start in earnest until Q3.
However, the healthcare bill setback earlier this year may push back that timeline even further. President Trump has said he would like to champion through health reform prior to tax reform, and the death of the healthcare bill showed that with the internal dynamics of the GOP, sweeping change could be complicated. Thus, there may not be the momentum to push through such sweeping reform this year.
The Give and Take of Politics
Even with control of both houses in Congress and the White House, the healthcare debacle showed that President Trump and the Republican party cannot pass sweeping changes on their own. And, these efforts will take time. There are internal factions within the Republican Party – like the Freedom Caucus – who will need to get on board. If the Freedom Caucus defects, further compromise – and some bipartisan support – will be necessary to get any corporate tax cuts through. Given the political climate, it is worth asking how much appetite Democrats currently have to compromise with a Trump White House and hand the administration a political win.
Healthcare’s failure has no doubt slowed tax reform’s momentum, as the savings from the healthcare bill were crucial to offsetting the budget impact of lower tax revenue. Without these savings, tax reform could cause a deficit and will face even more opposition in Congress.
The Border Adjustment Tax
The BAT is one way Congress is currently looking to fill the potential revenue void. If implemented, it could add $100 billion a year in tax revenue. However, while it would help make up for the lost tax revenue, it could add costs for most all multinational corporations, and understandably, is very controversial. Opposition groups such as the Americans for Affordable Products, formed by American retailers, is rallying against it. These internal and external pressures could hinder the BAT from getting passed at current levels or at all. Without the BAT, the proposed tax reform is not revenue neutral, again creating more opposition within Congress.
With these thoughts in mind, if tax reform is going to occur under this administration, it is going to require compromise, and it won’t occur quickly. Whatever does not happen in 2017 could be tried in 2018, an election year, in which inter-party dynamics become more challenging and the potential for compromise is lower.
The ITC has Support
Our belief at Sol Systems is that the solar Investment Tax Credit – which is already set to step down starting after 2019 to 26% in 2020, 22% in 2021, and plateaus at 10% after 2023– is safe. Solar has bi-partisan support, and is good for jobs. The extension of the ITC at the end of 2015 was a bi-partisan effort. We increasingly see red states and their leadership embrace solar. For example, of the top ten solar states from 2016, five are red states, including Texas and Utah, states with representatives on the House Ways and Means Committee and Senate Finance Committee rank among. Additionally, Representatives Tom Reed (R-NY) and Mike Thompson (D-CA) on the House Ways & Means Committee, and Senators Dean Heller (R-NV) and Michael Bennett (D-CO), have all been strong champions of economic development through solar, and recognized for their support.
One of the main reasons states are supporting solar is jobs. In 2016, the number of solar jobs increased by over 51,000 workers, a 25% increase from 2015, and a 2% percent share of all new jobs in 2016. As Sol Systems CEO Yuri Horwitz stated earlier this year “Our view is that an administration focused on creating jobs and growing the economy will not take an axe to the ITC at such a critical stage in the industry’s development given the industry’s more than 200,000 jobs.” Today, the solar industry employs 260,000 Americans across the country.
Considering the failure of the healthcare bill, we do not expect speedy action on tax reform or potentially success in this area at all. Strong investment opportunities continue to be available in the solar industry, and tax appetite exists to meet them. Some potential investors may perceive uncertainty regarding solar’s future due to pending tax reform, which has caused some perception problems, but the actual threat is relatively benign. For the investors already at the table, the increased demand for tax equity will have a positive effect on yields.
This is an excerpt from the April 2017 edition of The SOL SOURCE, a monthly electronic newsletter analyzing the latest trends in renewable energy based on our unique position in the solar financing space. To view the full Journal, please subscribe or e-mail firstname.lastname@example.org.
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