As the elections season begins, tax reform is quickly becoming a national focus. With support from both the democrats and republicans legislation should be introduced next year. Simplifying the tax code and eliminating many credits and deductions should be on tap. Tax reform provides us with an opportunity to remove barriers to efficiency investments imbedded in the current tax code and to use the tax code as a tool to support more efficient energy management in the future more than current provisions do.
ACEEE, American Council for Energy-Efficient Economy has begun laying the groundwork for tax reform and energy efficiency with a series of papers. This week they released the second in the series entitled Modifying How Energy Costs Are Treated for Business Tax Purposes in Order to Remove Barriers and Increase Energy Efficiency.
Currently the tax code does not encourage real energy savings by businesses. Since energy bills count as a business expense and are subtracted from the total amount of taxable income, effectively, the federal government is typically “paying” 25% of business energy costs (based on the average effective business tax rate of about 25%). Subsidizing energy costs enables higher energy consumption.
When a firm makes capital investments, these expenses must be depreciated, meaning they are only recovered gradually. In the meantime the firm must carry the un-depreciated value on its books, which can reduce the incentive to make investments.
ACEEE suggests that the tax code should be structured to encourage businesses to reduce energy consumption instead of encouraging energy waste. They suggest three new ways to treat business energy costs in the tax code. The first way would shift business taxes to focus on income, not expenses as the federal income tax does. Tax 3-4% of the revenue instead of the current tax that taxes the profits at about 25%. The second approach is also simple it would eliminate deductibility for just energy costs, although partial deductions would still be allowed for firms with very high energy costs as a percent of revenues, in order to not put these firms at a disadvantage in international trade. The third, more complicated, approach would reward businesses that operate with below-average energy costs relative to the average in their industry, while penalizing businesses that consume large amounts of energy. The paper included examples to illustrate how each of these options might work.
The options presented in this paper would reduce the need for specialized tax incentives currently in place energy efficiency while simplifying the tax code. The ACEEE realizes that tax code reform is not all about energy efficiency but feels we should use the code to encourage business to improve their energy management systems.
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