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Wednesday, May 5, 2010

Incentivize clean energy?

There are a few bills in Congress that would provide some type of tax benefit for some form of clean energy production or development. Why? They are all intended to encourage such clean energy activities and to help subsidize costs such as are likely in new industries or investments.

For example, H.R. 5142 would provide a 30% investment tax credit for "qualified property which is part of a qualified cellulosic and algae-based biofuel facility."

These provisions complicate the law. They also tend to be narrow such that one type of clean energy activity is subsidized or encouraged which means that others are not (thus, the proposals are not neutral - they can affect decision-making and they harm economic efficiency by distorting investments).

I don't expect this practice to stop anytime soon because we have all come to expect this and lawmakers are eager (it seems) to provide tax breaks (see my prior post on at least one member of Congress bragging in a mass email about the $800 billion of tax cuts made (with no mention of the large deficit and additional debt they create)).

To best meet principles of good tax policy, lawmakers should consider:
  • Is the incentive truly needed? Is there evidence that certain viable clean energy production activities are not taking place due to costs or taxes?
  • If a subsidy is warranted, couldn't it be administered through the Dept. of Energy where companies would request a grant for eligible projects?
  • If they believe it has to be a tax break, can it be done without modifying existing rules. For example, one benefit of the ITC is it leaves the depreciation rules intact (but depreciable basis likely has to be reduced by the credit claimed).
  • Is it clearly temporary? What is temporary today when so many provisions are renewed even retroactively? But if it is worded to provide that it is intended to help get an industry or process underway and will terminate within 2 or 3 years, perhaps that will help in truly making it temporary.
  • Can the benefit be written broadly so that it doesn't benefit just one narrow type of activity within a broader field, such as encouraging just one type of biofuel when there are many natural substances that can be made into a biofuel.

Hopefully these items will be discussed when any of these bills get a hearing.

What do you think?

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