On November 19, the House of Representatives approved a budget reconciliation bill entitled the Build Back Better Act (H.R. 5376), which contains President Biden’s core legislative priorities related to healthcare, the environment, education, and social spending.
The bill contains ambitious new measures to address climate change, including an estimated $555 billion worth of tax credits, spending measures, and other climate-related initiatives. These provisions are intended to set the United States on course to meet its emissions reduction targets, but some of them also reflect industrial policy considerations, including a desire to promote domestic manufacturing of clean energy technologies and related goods. Several of the climate-related tax credits in the bill, including those for electric vehicles, investments in clean energy, and electricity production, contain "bonus" tax credits that are contingent upon the use of domestic content. If enacted, these provisions are likely to draw complaints from the United States'trading partners on the grounds that they discriminate against imports in favor of domestic goods. This alert summarizes the main domestic content provisions in H.R. 5376.
Elevated tax credit for electric vehicles satisfying domestic assembly and domestic content requirements
H.R. 5376 would extend and modify an existing tax credit for purchases of "qualified plug-in electric drive motor vehicles" ("qualifying EVs"), codified at Section 30D of the Internal Revenue Code ("Section 30D").1 Section 30D currently provides tax credits of up to $7,500 to individuals who purchase qualifying EVs, subject to a limit of 200,000 vehicles per manufacturer (i.e., once a manufacturer has sold 200,000 qualifying EVs, the tax credit begins to phase out with respect to qualifying EVs sold by that manufacturer). Among other changes, H.R. 5376 would re-codify this provision at new Section 36C, remove the 200,000 vehicle limit, and increase the maximum value of the tax credit to $12,500. It would increase the maximum value of the tax credit by:
- Increasing the base amount of the credit, which applies to all qualifying EVs, to $4,000 (from the current $2,500);
- Providing an additional credit of $3,500 for qualifying EVs with a gasoline tank capacity not greater than 2.5 gallons and a battery capacity of not less than 40 kilowatt hours (increasing to 50 kilowatt hours after December 31, 2026);
- Providing an additional credit of $4,500 for qualifying EVs that satisfy "domestic assembly qualifications," which require that "the final assembly of such vehicle occurs at a plant, factory, or other place which is located in the United States and operating under a collective bargaining agreement negotiated by an employee organization"; and
- Providing an additional credit of $500 for qualifying EVs that satisfy "domestic content qualifications," which require that vehicles "are powered by battery cells which are manufactured in the United States[.]"
In addition, the bill would amend the definition of a qualifying EV so that, after December 31, 2026, an EV will be ineligible for any tax credits under new Section 36C unless it is assembled in the United States. The tax credits provided in new Section 36C would remain in effect until December 31, 2031, unless they are modified or extended.
Elevated tax credits for energy projects using domestic content
H.R. 5376 would create new tax credits related to clean energy and modify certain existing tax credits, including those related to electricity production and investment in energy projects. In some instances, the bill would provide "bonus" tax credits where an energy project satisfies domestic content requirements for iron, steel, and manufactured products, as discussed below.
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Production tax credit for electricity produced from certain renewable resources ("Section 45 PTC"). H.R. 5376 would modify and extend the electricity production tax credit codified at Section 45 of the Internal Revenue Code, which allows energy producers to claim a credit for electricity produced from certain renewable resources.2 This provision as amended by H.R. 5376, would normally provide a tax credit of up to 2.5 cents per kilowatt hour (KWh) of electricity produced and sold by a facility during its first ten years in operation (effective with respect to facilities placed in service after December 31, 2021). The types of facilities eligible for the revised credit would include wind, solar, hydropower, and geothermal energy facilities, among others. Facilities would be eligible for a "bonus credit" equivalent to 10 percent of the value of the credit if they satisfy domestic content requirements, which provide that: (1) any iron or steel product that is a component of the facility upon completion of construction must be produced in the United States;3 and (2) the manufactured products that are components of the facility upon completion of construction must satisfy a domestic content threshold. For most types of facilities, the domestic content threshold for manufactured products would phase in as follows:
Date on which construction of the facility begins Domestic content threshold Before January 1, 2025 40 percent After December 31, 2024 and before January 1, 2026 45 percent After December 31, 2025 and before January 1, 2027 50 percent After December 31, 2026 55 percent For purposes of this requirement, the domestic content of the manufactured products in a facility would be measured by calculating the total cost of the manufactured products that are "mined, produced, or manufactured in the United States" as a percentage of the total costs across all manufactured products of the facility.
- Investment tax credit for energy property ("Section 48 ITC"). H.R. 5376 would extend and modify the investment tax credit codified at Section 48 of the Internal Revenue Code, which allows taxpayers to claim a credit for the cost of certain energy property.4 This provision as amended by H.R. 5376 would normally provide tax credits valued at up to 30 percent of the basis of the energy property (referred to as the "energy percentage"), for facilities placed into service after December 31, 2021. The types of properties eligible for this credit would include solar, geothermal, and wind energy facilities, fuel cell property, energy storage technology, microgrid controllers, linear generators, and biogas properties, among others. Such properties would be eligible for a bonus credit if they satisfy domestic content requirements similar to those that apply to the Section 45 PTC (described above). The bonus credit would be a 2 percentage point increase to the energy percentage, or a 10 percentage point increase if the facility also meets certain prevailing wage and other labor-related requirements.
- New tax credits for clean electricity production ("clean electricity PTC") and investment ("clean electricity ITC"). H.R. 5376 would create a new "emissions-based" tax incentive for electricity-generating facilities, codified in new Sections 45BB and 48F of the Internal Revenue Code. These provisions would allow taxpayers to choose between a production tax credit and an investment tax credit that is based on the carbon emissions of the electricity generated. Power facilities could qualify for the credits regardless of the technology they use, provided that their "greenhouse gas emissions rate" is not greater than zero.5 Normally, the clean electricity PTC would provide a credit of up to 2.5 cents per KWh of electricity produced and sold in the ten-year period after a facility is placed in service, whereas the clean electricity ITC would provide a credit worth up to 30 percent of the investment in the year the facility is placed in service. Facilities that satisfy domestic content requirements would be eligible for elevated tax credits (generally equal to a 10 percent increase to the value of the clean electricity PTC or a 10-percentage point increase to the rate of the clean electricity ITC). The domestic content requirements would be similar to those that apply to the Section 45 PTC and the Section 48 ITC (described above).
- "Elective payment" of applicable credits contingent on domestic content. H.R. 5376 would make certain energy-related tax credits refundable, including those mentioned above (i.e., it would allow taxpayers to elect to be treated as having made a tax payment equal to the value of the credit they would otherwise be eligible for under the relevant provision). This "elective payment" option is intended to allow entities with little or no tax liability to accelerate utilization of the credits, rather than carrying them forward to years when their credits can offset their tax liability. However, the elective payment option would phase out with respect to the above-mentioned tax credits (the Section 45 PTC, the Section 48 ITC, the clean electricity PTC, and the clean electricity ITC) if the facility at issue fails to satisfy the applicable domestic content requirements. Specifically, if a facility does not satisfy the domestic content requirements, the value of the credit for which elective payment would be available would decrease by: 6
- 10 percent, if the construction of the facility begins in 2024;
- 15 percent, if the construction of the facility begins in 2025; and
- 100 percent (i.e., no elective payment would be permitted), if the construction of the facility begins in 2026 or thereafter.
The bill would authorize the Secretary of the Treasury to provide "appropriate exceptions" from the phase-out rule where (1) the inclusion of domestic products increases the overall costs of construction by more than 25 percent; or (2) relevant domestic products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality.
Outlook
The above-mentioned provisions of H.R. 5376 are partly intended to reduce greenhouse gas emissions, but proponents of the legislation acknowledge that this is not their sole objective. For example, the White House has emphasized that the legislation is intended to "[e]nsure clean energy technology – from wind turbine blades to solar panels to electric cars – will be built in the United States with American made steel and other materials, creating hundreds of thousands of good jobs here at home."7 Foreign governments have expressed concern that the bill’s domestic content provisions would place foreign suppliers of electric vehicles at a serious disadvantage in the US market, and some energy industry representatives have asserted that the provisions would cause many firms to shift to domestic suppliers of materials and components for energy projects.8 If these provisions are enacted in their current form, there is a strong possibility that foreign governments will challenge them through WTO dispute settlement or similar mechanisms provided in US free trade agreements (FTAs).
In order for H.R. 5376 to become law, it must now pass the Senate, which will require unanimous support from all 50 Democratic Senators. At this stage, not all Democratic Senators have endorsed H.R. 5376, and the Senate is expected to modify the bill before voting on its passage. Several of the United States' closest trading partners have asserted that domestic content provisions in H.R. 5376 would violate the United States' commitments under the WTO Agreement and US FTAs, such as the US-Mexico-Canada Agreement (USMCA).9 Canadian officials raised this concern directly with President Biden and Members of Congress at the North American Leaders' Summit on November 18, emphasizing their view that the tax provision concerning electric vehicles violates the USMCA and has the potential to become the "dominant issue" in US-Canada relations. Nevertheless, it is unclear whether the provisions will be modified and the Biden administration has touted them as an important part of its strategy to grow domestic supply chains in critical industries.
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1 26 U.S.C. § 30D.
2 26 U.S.C. § 45.
3 The bill stipulates that the domestic content standard for iron and steel products must be applied in a manner consistent with the "Buy America" regulations promulgated by the US Department of Transportation – specifically 49 C.F.R. § 661.5(b), under which iron and steel products are treated as domestic only if "[a]ll steel and iron manufacturing processes . . . take place in the United States, except metallurgical processes involving refinement of steel additives[.]"
4 26 U.S.C. § 48.
5 The bill defines the greenhouse gas emissions rate as "the amount of greenhouse gases emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO2e per KWh." For facilities that product electricity through fuel combustion or gasification, the greenhouse gas emissions rate would be "the net rate of greenhouse gases emitted into the atmosphere by such facility (taking into account lifecycle greenhouse gas emissions)…expressed as grams of CO2e per KWh."
6 Facilities that do not satisfy domestic content requirements would be exempt from the phase-out of elective payment if they have a maximum net output of less than one1 megawatt.
7 "President Biden Announces the Build Back Better Framework," The White House, October 28, 2021.
8 See, e.g., Letter from Ambassadors of the EU, Japan, Canada, Mexico, Korea, and other Countries Regarding Electric Vehicle Tax Incentives, October 29, 2021
9 See, e.g., Letter from Canadian Trade Minister Mary Ng to Congressional Leaders, October 22, 2021.
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