Tax Reform Gives Us Opportunity to Rethink Expenditures for Energy
In recent years, we have seen an overwhelming spending binge for energy. In 2010 alone, we saw $16.3 billion in tax expenditures, primarily benefiting the nebulous, politically favored “green technologies,” allowing Washington to pick winners and losers in energy. Now, we’re running the risk of such high levels of spending becoming the “new normal,” with predictable camps in Washington bemoaning any cuts that keep them from picking winners.
The Joint Committee on Taxation lists 30 distinct energy-specific tax provisions that form a messy patchwork of incentives without any discernible long-term plan or purpose. As budget and tax reform debates force us to make decisions on which provisions to keep, we can expect to hear little more than an ideological tangle over fossil versus renewable spending. The questions that really demand answers are: What is the purpose of tax expenditures? What role do they play in implementing a strategic energy strategy that increases the reliability of energy sources, restores and improves infrastructure, pushes private investment into the marketplace, and minimizes waste to hold costs down?
At present, disparate fuels and technologies receive dissimilar tax treatment. This muddies the marketplace and prioritizes investment based upon the availability of government expenditures – not what the market indicates are the most important or useful energy technologies. More than that, tax breaks are too often extended piecemeal for short periods. The resulting boom-and-bust cycles are a predictable extension of our convoluted and confused energy strategy.
Federal tax policy is also complicated by policy decisions at the state level. For instance, Renewable Portfolio Standards and variations of the policy, present in 38 states, require providers to source a specified and increasing portion of the electricity supply from renewable sources. Projects designed to meet these state requirements benefit from large federal tax incentives, meaning individual state policies are subsidized by all tax payers in all states.
Finally, offering tax incentives generally keeps energy prices below market, particularly for electricity. With artificially low energy prices, individual customers have minimal incentive to engage in conservation or efficiency measures. Without private investment in conservation, government provides pricey tax incentives for that, too.
The current conflict over whether to extend the production tax credit for wind is a great example of the unintended consequences of the existing tax code. Undoubtedly the credit has been successful in encouraging investment in new wind generation capacity; an extension of even one year will cost us about $1.4 billion. At the same time, current capital investments fail to support the grid improvements and storage technologies necessary to help new wind capacity compete with baseload fossil power. This is an incomplete approach to bringing wind power (and other intermittent sources) on-line in significant amounts, and is an unfortunately overlooked reflection of the short-sighted energy strategy built in to our tax code.
In the absence of a proactive federal policy, tax expenditures and direct government spending are the most comprehensive and powerful set of signals we have to shape capital investments in energy. The relevance of these expenditures compels a serious evaluation of what our energy priorities are. Political expedience has given us a complicated and sometimes counter-productive tax code; let’s use tax reform to advance a sensible domestic energy agenda.
This piece originally appeared on the National Journal Expert Blog.