Health care and solar power seem to be worlds apart. Yet the massive health care bill could cast a pall on renewable energy.
How? The link is an obscure tax provision in the House version of the health care bill, explains tax attorney Jerome Breed, a partner at Bryan Cave LLP. The provision actually has nothing to do with health care either—its purpose is to raise revenue.
The provision centers around the idea of “economic substance.” It puts into legislation the idea that a transaction (such as putting solar panels on a business) has to have some economic substance (i.e. an economic return) to be eligible for a tax credit. In the case of solar panels, the federal government offers a tax credit of 30% of the cost of systems business owners or investors install. But what if the return is mostly in the tax credit—so that the owener or investor really doesn’t get any other economic benefit? “It’s not clear if, when you take away the effect of the credit, there has been a meaningful change in their economic position,” explains Breed. So if an economic substance requirement passed, the owner or investor would no longer be eligible for the tax credit.
Renwables power isn’t the only industry that could get hit by this provision. The economic substance doctrine would also make it harder to use the low income housing tax credit, the credit for rehabbing historical buildings, and others, says Breed.
Why is the provision in the bill at all? It’s a revenue raiser. The House expects to get about $5.4 billion, mostly from penalties levied from transactions that don’t meet the economic substance test. The provision is also supposed to discourage people from entering into transactions that don’t result in economic substance, thus preventing tax money for being used for dubious purposes.
Clearly, some sort of provision disallowing dubious transactions is needed. Otherwise, “there could be fraud,” says Breed. “Someone could claim tax credit for building 1000 solar panels in the desert that don’t exist, or could claim that the panels cost $1 million when they only cost $100,000. So it’s appropriate to protect against that type of transaction.”
The worry is, though, that a blanket prohibition against transactions without economic substance will also knock out many legitimate transactions. Tax lawyers have been meeting with the Joint Committee on Taxation to push for a compromise position, so far without success.
BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.