July 29, 2005

July 29, 2005 | WebMemo on Energy and Environment

The Bad Tax Bill Within the Bad Energy Bill

Within the just-passed energy bill are tax provisions containing a wide variety of inducements designed to help solve the nation's energy challenges. According to the Joint Committee on Taxation, the proposed tax measures could cost $11.5 billion through 2015. The real price tag could go even higher, but in any event, Americans will not be getting much in return. In fact, the tax provisions are little more than a collection of old ideas that have never worked, new ideas unlikely to work, and a lot of pork for the energy industry.

 

Back to the 1970s

Some of the tax measures in the energy bill are throwbacks to Jimmy Carter's energy policy. For example, the bill resurrects tax credits for the purchase of residential solar power introduced by the Carter Administration but later taken off the books by President Reagan.

 

Reagan was right-these tax credits accomplished little. As it turned out, even federally-subsidized solar is unlikely to earn back, in the form of energy savings, the up-front cost of the equipment, and the tax incentives induced many homeowners into making a purchase that they later regretted. Indeed, this often proves to be the case-there almost always is a good reason why the subjects of these tax breaks can't catch on without government help.

 

And now a new generation of homeowners will have to learn this the hard way. In addition to solar power, the energy bill brings back or extends tax breaks for a host of household energy-saving devices.

 

The bill even extends the tax credits for one of the oldest alternative energy boondoggles of them all: electric cars.

 

Overall, 1970s-era energy policy was a disaster, and its use of the tax code to influence energy choices did more harm than good. Unfortunately, the energy bill repeats many of the same mistakes.

 

Washington's Crystal Ball

Many tax breaks exist for research, development, and production of new energy sources. The idea is that the federal government can and should direct our energy future. Under the energy bill, just about every newfangled energy idea that has had trouble gaining a toehold in the market by itself will now get tax help.

 

Emerging technologies like clean coal and fuel cells are among the "next big things" targeted for special tax breaks. However, Washington has been trying to pick technological winners for a long time, and the results have been mixed. Frequently, lawmakers have chosen losers and showered them with tax breaks that ultimately delivered little of value. Meanwhile, most of the winners would have emerged without federal largesse. Either way, new energy technologies will not come about as a result of the kind of central planning that's rife in the energy bill.

 

Tax Code Pork

There are several tax provisions that make only a thin pretense of providing energy benefits for the American people but are really designed to help a special interest. For example, the bill contains provisions for a new type of energy bonds for which the interest is paid by the federal government. Thus, energy producers meeting certain conditions can essentially borrow money interest-free-with taxpayers footing the bill. There are also tax credits to help pay for construction of new power plants. The bill even includes new incentives for oil drilling, as if $59 per barrel isn't incentive enough.

 

Some of the non-tax provisions in the energy bill dole out additional pork to energy producers who already enjoy favorable tax treatment. For example, the energy bill provides that 7.5 billion gallons of ethanol be added to the fuel supply annually. This ethanol mandate is good news for Midwestern corn farmers and big ethanol producers but will raise the price of gasoline at the pump. Even without this mandate, ethanol producers already get plenty of pork, most significantly in tax breaks worth more than 50 cents per gallon. Ethanol has never been cost competitive with gasoline, and thanks to the federal government, it never has to be.

 

None of these measures will do much good for the energy-consuming public, but they will create taxpayer-funded windfalls for many sectors of the energy industry.

 

In sum, there has never been any reason to believe that the tax code can do a better job than markets in making the right energy choices for America. Yet, Washington keeps trying. In this respect, the energy bill is the same old failed policy on an an unprecedented scale.

 

Ben Lieberman is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies