Clean energy tax package undergoes substantial shifts

Democrats agreed to cut off electric vehicle credits for higher-income households, expand to hydrogen-fueled cars

Senate Energy and Natural Resources Chairman Joe Manchin III, D-W.Va. (Tom Williams CQ Roll Call file photo)
Senate Energy and Natural Resources Chairman Joe Manchin III, D-W.Va. (Tom Williams CQ Roll Call file photo)
Posted July 29, 2022 at 10:49am

Democrats made concessions to get Sen. Joe Manchin III on board with spending hundreds of billions of dollars on clean energy incentives in the revamped budget package unveiled late Wednesday, but they were able to preserve versions of key pieces that he’d targeted as concerns.

The clean energy tax credits in the text of a deal between Manchin, D-W.Va., and Senate Majority Leader Charles E. Schumer, D-N.Y., include up to $7,500 for buying electric vehicles and limited "direct pay" credits, which would allow incentives to be doled out in cash to project developers who don't owe enough in taxes to ordinarily qualify. They also shift sooner to an "industry-neutral" approach to green energy incentives long championed by Senate Finance Chair Ron Wyden.

“This legislation ensures that the market will take the lead, rather than aspirational political agendas or unrealistic goals, in the energy transition that has been ongoing in our country,” Manchin said in a statement ahead of the deal’s formal announcement. He added that the legislation would incentivize technologies for all fuel types including hydrogen, nuclear, renewables, fossil fuels and energy storage to be as clean as possible.

The Manchin-Schumer deal to add climate and tax provisions, worth an estimated $370 billion over a decade, back into the budget reconciliation bill Senate Democrats aim to pass next week was a welcome surprise to much of the caucus. Manchin nixed moving on those issues before the August recess just two weeks ago.

Democrats don't need Republican votes to advance the package thanks to the filibuster-proof reconciliation process, but they need every member of their caucus in the 50-50 Senate.

It’s taken over a year of effort to get Manchin to sign on to a bill, which still faces potential hurdles from a handful of other Democrats who may have issues with what’s in and left out of his slimmed-down version of a climate, tax and health care bill.

EVs in

As Schumer worked to get Manchin to a deal earlier this summer, he’d offered to strike policies the West Virginia centrist had opposed including electric vehicle tax credits and direct payments for clean energy incentives, according to a Democratic source familiar with the situation. But ultimately, Manchin agreed to reworked versions of those provisions, according to legislative text Democrats released Wednesday night.

The electric vehicle incentives — rebranded as “clean vehicle” credits because they’re also open to hydrogen-powered vehicles that Manchin favors — would be worth up to $7,500, in line with Senate Democrats’ previous iteration of the reconciliation bill from last fall.

But instead of tying access to the full credit to battery capacity and domestic assembly requirements, the new format is based on sourcing from allies. Half the credit would hinge on whether a certain percentage of battery components are made or assembled in North America, with the other half tied to a certain portion of critical minerals used for the vehicle being extracted or processed in a country where the U.S. has a free trade agreement, or recycled in North America. The percentages rise over time.

The new language addresses concerns that a significant portion of materials for electric vehicles come from China. Manchin said those seeking an immediate transition to electric vehicles and away from gasoline- and diesel-powered cars don't recognize that the U.S. has "no ability at all to be self-contained," or source the component parts domestically.

Manchin said Thursday he’s concerned that the U.S. lacks energy security, citing threats from adversaries. He said Chinese President Xi Jinping is watching the U.S. and knows he currently has the U.S. beat when it comes to critical mineral supplies.

Now that the U.S. needs batteries, “he knows that we can’t produce it ourself cause he has captured that market,” Manchin said at a virtual press conference. “And I’m just thinking, that's not who we are as a country. We got to do something.”

Democrats also added language including U.S.-made battery components and critical minerals in advanced manufacturing credits, which also offset the costs of making components for wind and solar.

Another edit further means-tested the credits, after Manchin previously took issue with the idea of higher earners getting the benefits. They’re cut off for individuals earning above $150,000 and married couples filing jointly making over $300,000. A smaller, $4,000 credit for buying used "clean vehicles" cuts off at income thresholds that are half of those for the new-vehicle credit.

Including electric vehicle credits is a win for many Democrats and Michigan’s delegation in particular, who’ve sought to get rid of the 200,000 car-per-manufacturer cap on the credits, which major automakers General Motors Corp. and Ford Motor Co. hit or are running up against. Under the new language, consumers could choose from any manufacturer that otherwise qualifies and still get a tax break, no matter how many electric vehicles they’ve sold.

Sen. Debbie Stabenow, a Michigan Democrat who’d pressed for the electric vehicle incentives, told reporters that one of the most important provisions that made it into the reconciliation text is one she wrote that would allow consumers to get the benefits when they buy vehicles, instead of waiting until tax time.

'Direct pay'

Another issue Democrats salvaged in a more limited form is direct pay, which allows companies to claim credits when they file their tax returns and get in cash any amount beyond what they’d otherwise owe in taxes. It strengthens the incentives but Manchin had taken issue with the possibility of government checks going out to big companies.

For the bulk of incentives in the package, direct pay is allowed for state, local or Tribal governments and nonprofits, which make up about 30 percent of the power market, according to a Democratic aide.

The ability to choose direct pay credits applies to all potential beneficiaries of incentives promoting the use of clean hydrogen; carbon capture, which can block greenhouse gas emissions from burning oil or coal; and advanced manufacturing facilities, including those that build batteries and other clean energy technologies and components.

The clean energy credits also saw other changes from prior iterations, including dropping some smaller provisions that didn’t pack as much punch in cutting emissions. For example, measures promoting bicycle commuting and electric bicycles fell out of the package.

Tax credits offsetting the cost of building new semiconductor manufacturing plants are also gone, after they were moved in a bipartisan economic competitiveness package the House sent to President Joe Biden’s desk on Thursday.

The clean energy credits as a whole shift faster to a technology-neutral approach that consolidates dozens of tax credits down into three that are available for any technology or fuel source as long as it meets emissions reduction or similar climate standards. The change happens after three years, instead of five in the previous version of the reconciliation bill.

It’s a win for Wyden, the Oregon Democrat behind the plan to overhaul clean energy incentives. House tax writers had favored their own plan of expanding and extending what’s currently in the tax code.

Wyden repeatedly pointed to estimates of his plan’s ability to slash emissions in the years to come. Schumer and Manchin said in a joint statement that their package as a whole — which includes measures to fight climate change beyond the tax incentives — would lower carbon emissions by about 40 percent by 2030.

The Finance Committee voted on a similar package of tax provisions last year.

“All you have to do is get up in the morning and look at the heat around the world and we in the Finance Committee passed a bill that goes further than anybody with tax has done in well over 100 years,” Wyden said. “We said, from now on the more you reduce carbon emissions, the bigger your tax savings.”

Lindsey McPherson contributed to this report.