House energy tax break cuts don’t go far enough – yet
- The repeal of the $7,500 electric vehicle tax credit for automakers like Tesla and others.
- A cut in the wind’s 2.3 cent-per-kilowatt hour tax credit to 1.5 cents and a phase-out in 2020 that could cut more than $11 billion from the deficit.
- The ending in 2027 of a 10 percent tax credit for utility-scale solar projects that was supported to be permanent.
- A credit for enhanced oil recovery.
- A credit for producing oil and gas from marginal wells.
The elimination of such tax provisions could amount to billions of dollars saved for the U.S. Treasury. But instead of continuing the good work of cutting wasteful programs, the House has maintained many of the legacy tax credits while adding one or two more for good measure.
These measures include:
- A $6 billion nuclear production tax credit to benefit the building of two nuclear reactors in Georgia.
- Retaining language providing a tax advantage for master-limited partnerships, or MLPs, that are generally used for pipeline and infrastructure financing.
- A depletion allowance for small oil companies allowing them to write off a portion of their first year’s production worth in excess of $1 billion per year.
- Adding new tax credits for geothermal, small-scale wind and fuel cells that were “left out” of a 2015 budget and spending deal.
All of these tax provisions are designed for technology- and industry-specific purposes and undermine the free-market principle of allowing energy technology to compete on a level playing field. Let’s hope the Senate maintains a broader view of the tax bill and takes a harder crack at the eliminating the remaining industry-specific tax preferences.
Last week, R Street published a white paper that came out against tailor-made tax policies that can distort investment and consumers behavior and recommended the elimination of nearly all narrowly-tailored tax provisions.
It’s worth noting that the Senate did not have to take the House legislation into account when publishing its tax plan at the end of last week. Senior senators from the Midwest are unlikely to support a major cut in the wind tax credit, and the Senate’s narrow 52-48 vote margin means there will be a need for near consensus on many tax issues.
Finding political consensus on good tax policy is always hard because the economic benefits – whether explicit, in the form of eliminating outright subsidies, or implicit, in the case of ending market distortions – are borne by an American public for whom the improvements are diffuse. Meanwhile, the cost of improving on bad policy is concentrated among narrower groups willing to expend much more political capital to maintain such distortions.
What is incumbent upon policymakers is to craft policy that ensures there is no preferential treatment. By eliminating distorting tax preferences, Congress can make huge strides toward the more level energy playing field for which all sides strive.
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