The Five Percent Rule Tortures the Plain Meaning of the Word \u201cConstruction\u201d and Means Delayed Economic Benefit<\/i><\/b><\/p>\n
If the \u201cfive percent\u201d interpretation is implemented, many companies might make that token investment and then wait several years for technology to mature or the economy to improve.\u00a0 Needless to say, that outcome would be distortionary and wasteful.<\/p>\n
If instead construction \u201cbegins\u201d with the physical act of construction, companies that otherwise might have sat on their investments will be incentivized to commence building sooner.\u00a0 Earlier construction would mean that the economic benefits of construction would be realized more quickly.\u00a0 While more money might be paid out under the five percent interpretation, more short-term economic stimulus would come from the physical act requirement.<\/p>\n
Senator Mark Udall, a strong supporter of the PTC extension, noted that the extension is meant to \u201cprovid[e] a strong incentive for developers to begin projects as soon as possible.<\/a>\u201d But Udall also understands that the word \u201cconstruction\u201d should have something to do with physical wok.\u00a0 As he stated<\/a>, \u201cSo if you put a shovel in the ground<\/i><\/b> on Dec. 31, at the end of this year, the tax credit will apply…\u201d<\/p>\n That being the case, the policy behind the PTC extension suggests that we should interpret \u201cbegins construction\u201d to mean, well, starting physical construction<\/i>.<\/p>\n Ample Precedent for the Physical Work Requirement<\/i><\/b><\/p>\n The legal precedent<\/a> is also on the side of the physical work interpretation.\u00a0 As shown in the attached IER white paper<\/a>, there is a long history of Congress and administrative agencies interpreting similar phrases (variations on \u201cconstruction begins\u201d) to require physical work on the project.\u00a0 To name just a few examples, the common-sense interpretation of beginning construction prevailed in the Tax Reform Act of 1969, the Revenue Act of 1971, the Tax Reform Act of 1976, the Revenue Act of 1978, the Tax Reform Act of 1986, and the American Jobs Creation Act of 2004.\u00a0 The IRS itself ruled that way many times, including in 2011, 2008, and 2006.<\/p>\n The Five Percent Alternative<\/i><\/b><\/p>\n Against all that precedent, the wind lobby can only offer the American Recovery and Reinvestment Act of 2009, when the Treasury Department interpreted \u201cconstruction began\u201d as including the five percent rule as a safe-harbor provision. A safe-harbor provision is intended to protect good faith, but unsuccessful, efforts to adhere to a given law. \u00a0Similar safe-harbors have appeared in other IRS guidance, but normally as a less-lenient 10% investment rule.<\/p>\n Bottom Line<\/i><\/b><\/p>\n The legal and policy arguments both weigh heavily in favor of the physical work requirement.\u00a0 Wind industry lobbyists would do well to accept the already-generous PTC subsidy without pushing a dubious interpretation to siphon off even more taxpayer money.<\/p>\n
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