July 15, 2011 | Commentary on Energy and Environment

NAT GAS Act is Nothing but a Tax Subsidy that Distorts Markets

In the market for a new truck? Consider this: If you buy a truck that the government favors, you'll get to keep $40,000 more than if you were to buy a different one.

While this may seem arbitrary and a bit silly, it's exactly what a bill known as the New Alternative Transportation to Give Americans Solutions (NAT GAS) Act seeks to do. The government chooses winners and losers by creating a special carve-out for a favored group. Buy the natural-gas technology and get $40,000 more, or buy the diesel technology and get $40,000 less.

The NAT GAS Act perfectly fits the definition of a subsidy because it uses the political process to support the consumption of one good over another. Noting this fact, however, sends the act's supporters through the roof. They prefer to call the subsidies "highly targeted tax incentives" instead of, well, "subsidies."

The spin doctors in D.C. try to camouflage the act as a tax cut. But the act only complicates the current tax system and picks out a very select group of "highly targeted" beneficiaries. It has little to do with lowering taxes and all to do with giving a favored interest an advantage, which will cripple competition and distort the market.

An example may help cut through the intentional misrepresentation of the NAT GAS Act. Suppose the Acme Trucking Co. is thinking of either replacing its old diesel truck with a new more-efficient one for $80,000 or retrofitting the old truck to run on natural gas, which would also cost $80,000. Under current law, the company pays the same income tax either way.

If the conversion is more cost-effective, Acme will choose that option over the diesel truck. There is no need for subsidies here, since every business owner knows cutting unnecessary costs will increase profits. But a fair comparison of costs and benefits is not what the NAT GAS supporters want.

Under the NAT GAS Act, the natural-gas option cuts the company's tax bill by $40,000 compared to the new-diesel option. So the act adds $40,000 to Acme's bottom line, but only when it buys the favored natural-gas technology. That $40,000 would be missing if Acme bought a new diesel or gasoline-powered truck instead. Pretending this is not a subsidy is nonsense.

Not only does the act slice the national-income pie to favor one special interest, it also makes the pie smaller. For instance, if the net-income generating potential of the diesel truck is $39,999 more than that of the natural-gas truck, this subsidy rewards Acme for choosing the worse option — an option that wastes $39,999 of our resources. And while the company may benefit, it's at taxpayer expense, since we're the ones left to pick up the $40,000 tab.

A further bit of nonsense that the NAT GAS Act supporters assert is that the bill will defund terrorists. In the proponents' dreams, the act will save 1.5 million barrels of oil per day ... by 2035. Though 1.5 million barrels is nothing to sniff at, 1.5 million either way won't scare any dictators, especially when the impact is spread out over a 25-year period.

If the bill's supporters seriously want to reduce America's dependence on foreign oil, a great place to start is to allow access to our domestic reserves. Opening access and streamlining permits would generate royalties and bonus-bids, creating additional income and government revenue instead of boosting the debt to cover the subsidies.

Rather than supporting a plan that benefits the politically favored few, a market-based approach would ensure that every American has access to affordable energy. This policy would not require subsidies, could generate more than 1.5 million barrels per day, and would get us there much sooner than 2035.

Attach whatever name you want to it, but that is the plan to follow.

David Kreutzer is the research fellow in energy economics and climate change at The Heritage Foundation.

About the Author

David W. Kreutzer, Ph.D. Senior Research Fellow, Energy Economics and Climate Change
Center for Data Analysis

First moved on the McClatchy News Wire service