Editor’s Note: EarthTechling, always looking to bring you interesting cleantech articles, is proud to repost this clean energy brief courtesy of partner Center for American Progress. Author credit goes to Richard Caperton.
Budget deficits drove the conversation in Washington in 2011 with the daily news dominated by government shutdown threats, the “super committee,” continuing resolutions, and arcane budgeting practices. Unfortunately, this left Americans convinced that government investments in the future are off the table because of large federal budget deficits that need to be reduced.
Americans were misled. As the Center for American Progress points out, the United States can balance our budget, reduce our long-term debt, and make key investments in our future all at the same time. CAP’s plan works toward a more vibrant economy where all Americans are better off and clean energy is an integral part of this future. Best of all, the investments that government needs to make are relatively modest and can be paid for by ending wasteful spending in the same energy sector.
There is no doubt that Americans need clean energy because it’s vital to our nation’s economic competitiveness, security, and health.
There is also no doubt that government will play an important role in making the transition to clean energy.
Why? Because the federal government always has been—and always will be—a player in energy markets. The federal government has made investments in energy for more than a century, by granting access to resources on public lands, helping build railroads and waterways to transport fuels, building dams to provide electricity, subsidizing exploration and extraction of fossil fuels, providing financing to electrify rural America, taking on risk in nuclear power, and conducting research and development in virtually all energy sources. There’s no reason that Washington should stop making new investments.
Considering the history, government investment has led to amazing developments, including universal access to reliable and affordable electricity, lasting economic development, and industrial growth. This success story alone could justify continued government engagement of vibrant energy markets.
When we consider that investments in clean energy are investments in America’s future, it’s clear that the smart choice is to make these investments to meet the next generation of energy challenges and to produce a foundation of affordable, reliable, and clean energy alternatives for future waves of investment and opportunity. At the same time we can no longer afford indiscriminate or wasteful subsidies. It is essential that government’s investments in energy be fair, effective, and efficient.
This issue brief examines how the government currently invests in renewable energy, when those investments are effective, and how those investments should work in the future.
Energy and the tax code
The federal government has a suite of tools at its disposal to make investments, including cash grants, regulatory incentives, tax expenditures, and financing supports. When properly designed and targeted, each of these tools plays an important role.
In the energy sector most government investment happens through the tax code. Indeed, for energy companies that receive federal support, the most important day of the year is Tax Day, when they receive a large amount of their government benefits. In fact, 44 percent of energy spending in 2010 was through the tax system, with the remainder through other tools.
There are both good and bad reasons for this. Both companies and the government have an established system for paying and processing taxes, so providing investments through the tax code provides for efficient delivery of incentives by tapping existing infrastructure and rules. More cynically, however, tax expenditures are an expedient that may be at cross-purposes with good government practice because they are held to different budget standards than direct spending. This means that working through the tax code is less transparent and therefore far easier to pass through Congress with reduced budget scrutiny.
These issues are discussed in detail in the CAP report “Government Spending Undercover: Spending Programs Administered by the IRS” by Lily Batchelder and Eric Toder.
Tax expenditures are government spending programs that deliver subsidies through the tax code via special tax credits, deductions, exclusions, exemptions, and preferential rates. While the actual implementation can be complicated, tax expenditures are economically the same as direct spending both for the government and for beneficiaries. With direct spending, the government brings in tax money and then spends it, while with tax expenditures the government simply reduces the taxes that a company owes. Either way, the company has more money and the federal government has less.
Tax expenditures should be held accountable for achieving results
The underlying reasons for so much energy spending being done through the tax code are unlikely to change, at least in the short term. Therefore it’s important that energy tax expenditures work well. In previous CAP work we’ve called for regular reviews of all tax expenditures to ensure this spending is effective, efficient, and necessary.
There are some energy tax expenditures that clearly do not meet this standard. Sima Gandhi and I wrote in depth about this issue in “America’s Hidden Power Bill,” where we described obscure tax credits for the oil-and-gas industry that have existed for more than 80 years and have no demonstrable benefits for Americans. Such tax breaks simply provide windfall benefits to these mature industries at taxpayer expense. We also discussed several tax credits for clean energy that are much better designed.
This issue brief calls for Congress to take action on some of the most important clean energy tax issues in today’s policy and political debates: the production tax credit, the investment tax credit, and the Treasury Cash Grant Program. Each of these can be extended in a way that both leads to powerful incentives for investment in our energy future and represents good tax policy.
Finally, it’s important to note that each of the three primary issues is significant for a different reason. Because renewable energy sources have different characteristics they require different treatments within the tax code. Simply extending the production tax credit is not sufficient. Neither is extending the Treasury Cash Grant Program nor improving the investment tax credit. Congress needs to do all of these things. If Congress only takes action on one of these, they will in effect be “picking winners” across technologies.
Congress should instead focus on a comprehensive investment package that creates paths for all technologies so that American businesses will invest in the technologies that make the most sense for our country.
Three ways to invest efficiently and effectively
Fortunately, we already know some of the best ways for the federal government to make meaningful investments. Through effective and efficient use of the tax code, the government can continue to help drive deployment of the energy technologies that will be critical to our future.
This section describes the three most important tax issues for the government to consider in encouraging the next wave of strategic energy investment in the United States. They are:
- The production tax credit
- The investment tax credit
- The Treasury Cash Grant
Let’s look at each in turn.