On Energy, Taxpayers Survive (Mostly) Unscathed

After many months of speculation, we have the text of the tax extenders package. As expected, the deal extends a host of small expired or expiring tax provisions from the last several years. On the energy front, however, taxpayers have mostly dodged a bullet. With the exception a 5-year extension of the biodiesel tax credit and a one-year extension of the wind Production Tax Credit (PTC), the extenders deal does not include the host of expensive subsidies proposed by House Ways and Means Democrats last month in their GREEN Act. The extenders deal is expected to sail through Congress this week attached to one of the spending bills that must pass by Friday to prevent a government shutdown.

First the bad news: the biodiesel tax credit extension. Since 2005, this credit has provided a $1 per gallon subsidy for this niche product. The credit was originally created to reduce US oil imports in favor of domestic biodiesel production. But in the interim, the shale oil boom means that the US is now the world’s largest oil producer and is projected to be a net oil exporter as soon as next year. In the midst of this abundance, one might question why the federal government should continue to subsidize biodiesel. But for a special interest, there is no such thing as a temporary program, and the extenders deal retroactively renews and extends the credit through 2022. While this is disappointing for taxpayers, given that Sen. Grassley, a staunch protector of biofuel subsidies, is the chairman of the Senate tax-writing committee, an extension of this credit was always expected to be in any extenders deal.

In other, somewhat less, bad news, the deal also includes a one-year extension of the wind PTC.  The PTC is a direct handout to wind electricity generators for every kilowatt of electricity produced, which they collect over 10 years.  Another “temporary” subsidy that has never been allowed to die, the PTC has hung around since 1992. In 2015, a grand bargain was reached on a multi-year extension of the PTC in exchange for a phase-down of the value of the subsidy. At the time, and for many years since, we were assured by the wind industry that their technology was mature and ready to compete on a level playing field. For years now the media has been filled with assertions that wind and solar power generation are so competitive they are actually cheaper than their conventional competitors!

But as the phase down deadline has drawn closer, the tune predictably changed. Suddenly this supposedly super-competitive generation source cannot survive without continued subsidies. Under the current phase-down plan, the PTC alone was already expected to cost almost $33 billion over the 10 years to 2028, with taxpayers continuing to be on the hook well into the 2030’s. The additional year included in the extenders deal only adds to this bill, though we can at least be relieved that the extension is only for one year. The question remains for the wind industry, when will it ever be enough.

But it’s not all bad news.  Thanks to the reported intervention of President Trump, the proposed expansion of the electric vehicle tax credit was not included in the deal. This is a major victory for taxpayers and free markets. Under current law, the EV tax credit applies to the first 200,000 cars made by each manufacturer, distorting markets and expected to cost an estimated $10 billion. But at least it has a cap, limiting the harm. Tesla and GM, the two companies that have already used up their cap allotment, aggressively lobbied to keep the gravy train running. A bill from Sen. Stabenow, included in the GREEN Act, would expand the cap to 600,000 vehicles at an estimated additional cost of $15.7 billion. Thankfully, efforts to attach an expansion of the credit to this deal were unsuccessful.

The extenders deal also rejects other big-ticket items from the GREEN Act that would have distorted energy markets. In particular, the deal includes no modification to the Investment Tax Credit, a subsidy that gives solar developers a 30% tax credit on their projects. In the same 2015 deal that extended and phased out the PTC mentioned above, the ITC was extended and scheduled to be reduced to 10% over several years beginning next year. Like the wind industry, the solar industry has since taken to insisting that their subsidies should continue. The GREEN Act not only sought to extend the ITC for solar, but it also proposed to expand ITC eligibility to cover battery storage as well, since someone finally realized that solar only works during the day and needs backups.  Efforts to expand the ITC will continue, but this exclusion from the extenders deal is an important success.

Ideally, of course, Congress would reject all subsidies and distortions in energy markets, letting consumers decide which energy source or product is best for them. Failing that, Congress should at least not make things worse than they already are. While not perfect, this tax extenders package keeps the damage to a minimum. In today’s subsidy-happy Washington, that has to count as a victory.

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