Tax Reform Bill Moves Closer to Free-Market Energy Policy

COMMENTARY Energy Economics

Tax Reform Bill Moves Closer to Free-Market Energy Policy

Nov 3rd, 2017 5 min read
COMMENTARY BY
Nicolas Loris

Fellow in Energy and Environmental Policy

Nick is an economist who focuses on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.
The Tax Cuts and Jobs Act would repeal and sunset targeted tax credits for specific energy sources, technologies, and extraction methods. iStock

The GOP’s Tax Cuts and Jobs Act makes a profound policy statement that is to be commended: The goal of the bill’s energy measures is “to move closer to a free-market energy agenda.”

Free markets supply affordable energy, innovation, and a clean environment better than any heavy-handed regulatory approach to manipulate how people produce and use energy.

In getting to that goal, The Tax Cuts and Jobs Act would repeal and sunset targeted tax credits for specific energy sources, technologies, and extraction methods. Regrettably, though, the bill extends and phases out several energy tax credits that expired in 2016 and 2017.

Eliminating the preferential treatment in the tax code would drive energy innovation, competition, and job creation, resulting in a healthier, robust energy sector that isn’t dependent on Washington.

Targeted tax credits have become a popular and prevalent method for the government to award preferential treatment to certain energy industries. Tax credits initially intended to last only a few years continue to get additional lifelines from politicians who benefit from industries taking advantage of the credits in their respective districts and states.

Congress does no service to these energy technologies and companies by subsidizing them.

Rather than increase competition in energy markets, tax credits to specific energy technologies and sources distort energy investments. They artificially attract private-sector interest to the energy sources that Washington politicians think should be in America’s energy portfolio.

On the issue of energy tax credits, The Tax Cuts and Jobs Act is a mixed bag.

Cutting Oil and Natural Gas Subsidies

Proponents of renewable subsidies often argue that oil companies receive subsidies, so wind and solar should get some, too.

Yet the left often overstates its case on what truly counts as a subsidy for oil (e.g. broadly available tax credits) and ignores the fact that the government does far more to harm natural resource development than to help it.

The Tax Cuts and Jobs Act would eliminate bona fide subsidies targeted to the oil industry. It ends the enhanced oil recovery credit, which gives oil producers a 15 percent tax credit for costlier methods and technologies, such as injecting liquids and carbon dioxide into the earth.

Many enhanced oil recovery processes are no longer in use. The U.S. is now awash in oil resources, with new, innovative fracking technology to access it.

“The bill would also repeal the credit for marginal well production. Marginal wells are wells that produce heavy oil or minimal mounts of oil on the order of 15 to 25 barrels of oil per day. The credit for these wells is another safety-net tax provision that needs to go.”

Green Energy Subsidies: A Mixed Bag

The Tax Cuts and Jobs Act is a mixed bag on green energy policy, but if Congress can keep its promises, will be good policy in the long run.

The House does well in not using tax reform as an opportunity to extend wind and solar tax credits, as it has often done in the past. The omnibus spending bill in December 2015 was the last time Congress did this, constituting the current tax treatment of wind and solar to begin sunsetting those credits in 2022.

That decision diverted over $14 billion to the green energy industry over 10 years, which American taxpayers had to make up for. However, if Congress can keep its promise to sunset these wind and solar subsidies (as The Tax Cuts and Jobs Act does), it will be a victory in the long term for the taxpayer and the competitiveness of the energy sector at large.

Mixed with this, though, is how the bill approaches a slew of tax credits to other technologies—tax credits that had already expired.

The House should have let sleeping bears lie and not reopened these credits. Instead, the Tax Cuts and Jobs Act renews these credits and sets them on the same sunsetting track as wind and solar. The technologies include: hybrid solar lighting systems, fuel cells, small wind turbines, biomass, and geothermal energy.

This is poor policy. But if Congress can keep its promise to actually sunset these tax credits, it will be a victory in the long term.

The House also wisely clarifies which projects are eligible. In the past, subsidized projects had to have begun construction by the credit expiration date. This opened the door for fraud, where a company could stockpile solar panels or pour some concrete for “future projects” and still get the tax write off.

The Tax Cuts and Jobs Act requires “a continuous program of construction” for a company to be eligible.

Nuclear Tax Credits

The Energy Policy Act of 2005 created a tax credit for new nuclear power reactors up to the first 6,000 megawatts of capacity brought online by 2020. The Tax Cuts and Jobs Act extends that tax credit beyond 2020.

Of course, there is a reason for this: Several nuclear power reactors have struggled mid-stream to complete construction and will not make the 2020 deadline as planned.

If the nuclear industry was not able to get a few power plants permitted and built in 15 years, Congress should perhaps delve more into why. The way for Congress to help the nuclear industry compete is not with handouts and bailouts, but by addressing the government-imposed regulatory barriers that are stifling investment and technological innovation.

The best way to level the playing field is not to press more thumbs on the scale, but instead to remove all targeted tax credits for the production and consumption of energy.

The Heritage Foundation has consistently called for the elimination of all energy subsidies, including targeted tax credits for natural resource extraction, nuclear, renewables, biofuels, electric vehicles, and more. The federal government should stop using the tax code, loan guarantees, mandates, and grants to pick winners and losers in the energy space.

The Tax Cuts and Jobs Act is an important and necessary step in the right direction, but it should not extend and phase out credits that have already expired.

This piece originally appeared in The Daily Signal