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?

Green Taxation

The 110th Congress has proposed many bills that use the tax law to encourage some type of "green" behavior, such as replacing a car with a more fuel efficient one. There are also a few proposals that use the tax law to punish behavior that harms the environment, such as to increase the gasoline excise tax.

While it might seem simple to design a tax credit to encourage a homeowner to install a solar roof, these provisions are frought with many challenges. For example:

• Is the tax law the best way to go? The tax law is for raising revenue. Why not pass a law mandating that homeowners get some percentage of their power from solar? Why not find a way to encourage utility companies to provide more power generated from solar?
• If the tax law is used, how much incentive is needed and for how long? Should the incentive go to the buyer or the manfucturer?
• Are there unintended consequences? Will some current industry be harmed if the government helps develop a new industry? A consequence of efforts to get more alternative fuel vehicles on the road is that federal and state gasoline excise tax collections are down which hurts the Highway Trust Fund (and similar state funds). As noted in the last entry, the Department of Transportation needs Congress to allocate $8 billion to cover a shortfall in the fund due to a drop in gasoline sales.
• How will Congress pay for any new tax credit or deduction?

We'll likely see something enacted this year - perhaps an extension of some of the current energy and green deductions and credits that have expired or will soon expire. But more debate is needed on whether additional tax incentives should be added, how to modernize the gasoline excise tax to maintain the Highway Trust Fund, how to not favor one technology at the expense of another that might also help the environment, and what to do with any new revenue should a carbon or other environmental (polluter pays) tax be created

For more information on this topic, see my recent short article on Green Taxation.

What do you think?