Silly season is approaching again in Washington, D.C. No, I’m not referring to impeachment. I mean the feeding frenzy that erupts at the end of each year when energy-related tax breaks are due to expire.
Every energy interest that gets a break wants to keep it—and those that don’t, want one. Not coincidentally, members of Congress benefit from the annual game of tax “extenders” and “expanders,” using the uncertainty to extract contributions and favors.
The time has come to break this unhealthy cycle. Representative Tom Reed, who represents New York’s 23rd Congressional District, has proposed an Energy Sector Innovation Credit Act that points the way.
The key idea in Rep. Reed’s bill is to use the tax code to drive energy innovation. Such innovation is desperately needed to strengthen the U.S. economy, reduce the nation’s vulnerability to foreign threats, and tackle environmental challenges like air pollution and climate change.
Yet, far too often, tax breaks that their beneficiaries claim will catalyze energy innovation fail to do so, as documented in a recent report by the Information Technology and Innovation Foundation (ITIF).
Hundred-year-old incentives to stimulate oil and gas production, for instance, may have made sense when that industry was in its infancy, but they are hardly necessary for today’s giant companies. More recently, the 2005 Energy Policy Act provided a credit for energy-efficient new homes, but the criteria were so weak that builders received it without undertaking much innovation at all—and they lobbied to keep it.
Ironically, successful tax breaks may contain the seeds of failure. Wind energy is an example. The production tax credit put in place in 1992 to stimulate the industry did just that. Wind turbines became more efficient and costs dropped. Yet, even though wind power is now highly competitive in much of the country, taxpayers still subsidize it to the tune of $5 billion per year.
That money might be used to drive the next generation of clean energy technologies instead. In fact, the $18 billion doled by the federal government for energy tax incentives—much of it to already-successful incumbents—is more than double the $7 billion it spends on energy research and development.
The Reed bill would phase incentives down and then out as a technology’s market share grows. It would also reward more novel technologies with larger incentives, nurturing the next generation.
The Reed bill is limited to electric power and would still leave Congress with more control than would be ideal. The ITIF report recommends a system covering the full range of energy end uses, including transportation, buildings, and industry, as well as power. We also call for Congress to set the broad framework for incentives, such as its goals and total cost, but delegate the details about eligibility and duration to experts.
There is no silver bullet to solve the many energy challenges facing the nation. But tax policy is a tool that will help, if used smartly. Rep. Reed’s bill is a great step in the right direction.