Ronald Reagan, who left office 30 years ago, used to say that the big government approach to the economy could be summed up in three simple phrases: If it moves, tax it; if it keeps moving, regulate it; and if it stops moving, subsidize it. In some respects, Reagan’s view of government was too optimistic.
In practice, government often ends up trying to encourage and discourage the same activity at the same time through a patchwork of taxes, subsidies and regulations. And when a subsidy to one company ends up harming its competitors, often the solution is to subsidize them, too.
We can see this particularly when it comes to energy. In order to promote renewable energy sources, the federal government offers what’s known as a production tax credit, which allows wind and solar generators to deduct money from their taxes for every kilowatt-hour of electricity they produce. Companies that produce other forms of energy have objected to the cost these subsidies place on taxpayers as well as the folly of having government pick winners and losers.
That’s fair enough. Yet many companies are fine with an unfair subsidies system as long as it’s unfair in their favor. Last year, generators of coal and nuclear plants pushed hard for a Department of Energy proposal that would guaranteed them a profit. While the plan was ultimately shelved, advocates ended up looking more than a little hypocritical.
Texas isn’t immune from this mentality. The state has its own version of a production tax credit, only it’s for certain types of natural gas. The so-called high-cost gas deduction allows certain types of mostly unconventional wells to receive a reduced tax rate worth as much as half of the drilling and completion costs of the well. These are so-called high-cost deductions because eligible wells can get the deduction regardless of the price of natural gas on the market. For the last decade, natural gas prices have been at historic lows, and many wells end up flaring gas rather than bringing it to market.
That hasn’t stopped producers from taking advantage of the deduction. In 1997, the tax incentive applied to only 3 percent of wells; now it applies to more than half of wells, with costs to the state of around a billion dollars a year.
Unraveling this situation can prove difficult. Most companies profess themselves to be in favor of removing subsidies in general, but in practice, they seek to have the subsidies for their competitors selectively removed while keeping their own intact. What to one company is a clear subsidy is to another a necessary tax incentive. Complicating matters further is that the different subsidies and tax preferences involved are spread among different state, federal and local governments, so repealing them all at once is not an option.
Getting away from the tangled mess of energy subsidies won’t be easy. But key to doing so is to recognize that subsidies don’t just apply to only one type of energy source; pretty much every type of energy receives or has received some form of government subsidy over the years. And while political realities can’t be avoided, attempts to pare back subsidies should be as wide-ranging as possible, rather than a means for one form of energy to gain a competitive advantage. The best way to keep energy moving in the economy is by having the government keep its thumbs off the scale.
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