The stakes are certainly high, especially when it comes to the nation’s energy and tax policies. Failure to reform faulty policies, or worse, enacting more faulty ones in the name of “balance,” would seriously complicate efforts to ensure energy reliability and affordability in future years.
In general, automatic tax hikes make investment and job creation more expensive, which in turn discourages economic growth. Such recessionary policies ultimately lead to economic contraction, i.e. – recession. On the other hand, lower taxation and balanced regulatory policies are crucial catalysts for economic growth. Take for example taxes where a 40% rate on a small pie does not generate as much revenue as say a 25% rate on a larger pie.
Failed policies that have not delivered a positive return on investment for taxpayers should expire. When pundits discuss tax policies, the issue of credits, deductions and subsidies always comes up. These specialized tax treatments are designed to encourage pro-growth in targeted sectors that in turn grow the country’s economy. If successful, the result is a larger pie which translates into more revenue than would otherwise occur without the specialized treatment, including the cost of the program.
When it works, such policies can energize an industry sector or a specific segment of an industry. Similarly, an ill-conceived or poor performing policy not only does not grow the intended sector or segment, it often even fails to recoup the cost of the specialized tax treatment and associated programmatic costs. The key therefore is the ability to implement tax policies based upon the unbiased analytical review of economic data in order to determine which programs will work, and which ones will not. If the data reveals a loser, then the policies should be ended.
Unfortunately in the real world of Washington politics, decisions are sometimes not made in the abstract, non-emotional world of numbers and calculations. Policy decisions are influenced by numerous events, and most of the time the policy seems to be a good idea at the time it was created. Herein lies the crux of Washington’s troubles. Once started, a policy or program is much harder to reform, and sometimes impossible to end.
Take for example this year’s $1.3 billion tax credit for wind. That credit has not been a success in terms of stimulated the industry. Yet some policymakers have endorsed a program to create an $80 billion tax credit for renewables, with a large chunk going to wind. Not only is the current credit not generating sufficient revenue, many aspects of renewables cannot even survive in the marketplace without significant government investment. Even T. Boone Pickens, once an ardent supporter of wind power, has announced plans to scale back wind investment, primarily because natural gas has made wind unattractive to investors.
Research and development are crucial to this Nation’s ability to remain at the forefront of technological developments. By the same token however, if private investors will not invest in wind without billions in subsidies, then it is renewables that are not sustainable in the marketplace. That means it will never be able to produce revenue to offset the investment, and taxpayers are left with the tab. Ultimately a free market economy works because it is a consumer driven economy. Case in point. In the not too distant past, Ford made cars that were in the minds of its engineers, the best cars you could buy. My own uncle was a dedicated electrical engineer at Ford who was very proud of the car company. Unfortunately, the only thing flying off of showroom floors wasn’t the Taurus, it was the Camry. Ford learned, and things are different. Ultimately, manufacturers learn that they have to produce what people want to buy at an attractive price. If they do, they make money, and their brand grows, and they employ more people. If they can’t sell what they are making, then they go bankrupt, and people loose their jobs. Sound familiar?
Of course, those who defend (and benefit) from the wind credit say that instead of cutting their own credit, it is time to end oil and gas ‘subsidies.’ To an outside observer, this attempt at transfer may seem perfectly reasonable. Why should oil companies receive anything at all? The answer is simple, it actually “grows the pie.” Perhaps most people do not realize that the oil and gas industries do not really receive “subsidies” at all. After all, isn’t a subsidy a government hand out? Surely “Big Oil doesn’t need a government handout, right? At issue is what is less commonly, but somewhat officially, referred to as the “standard tax provision.” Despite what some say, Section 199 of the U.S. Tax Code provides a legitimate tax deduction available to nearly every American manufacturer. There is no such thing as an oil and gas subsidy.
Take for example ExxonMobil. That company pays governments nearly three dollars for every dollar in profits it earns for shareholders. Nick Schulz writes more about this stereotype-busting fact in his “Taxation Hero” post in Forbes. Take 10 minutes and look through the internet. If you do, you will see many stories where the oil & gas sector is largely responsible for pulling us out of recession. Yet there are some who want the very horses driving our economy to stop pulling. If that were to occur, we would all certainly notice. Increasing taxes on entities already paying more than their fair share is politically expedient, but certainly not a way to foster economic growth. Do most people know that dollar for dollar, Apple makes a higher rate of return on an iPad made in China than an oil or gas companies makes on their products?
The irony is that the rise in renewable energy will require more fossil fuels. A recent Los Angeles Times article highlighted the fact that wind and solar must typically be backed up by gas-fired generators for cloudy days. The environmental lobby’s dream of using taxpayer dollars to prop up today’s less than reliable renewable energy is impractical, and more importantly, we cannot afford it.
Given the nation’s $16 trillion (and growing) debt, budget cuts throughout government are indeed needed. But the President and Congress must ensure that cost-effective energy projects are not put at risk because of the fiscal cliff.
It is critical that our nation’s leaders work together to make government live within its means. But it should not come at the cost of perpetuating or doubling down on questionable tax policies that have contributed to the nation’s fiscal problems in the first place.
Read it on Forbes