A pro-growth tax plan to improve energy policy

Developing new energy technologies is a worthy goal, but the commercialization of those technologies must be led by the private sector, not the Obama administration’s policy of handouts and tax carve outs. We see in practice what happens when politicians prop up their favored energy sources. Green energy boondoggles — Solyndra, Beacon Power, Ener1, and now A123 Systems — routinely fail, sticking taxpayers with the bill.

Sadly, Washington insiders still don’t seem to get it. In early August, the Senate Finance Committee released a tax extender package that included carve outs for wind and solar, which would extend the status quo of failing green energy policy. This bill could be part of a broader negotiation on taxes that will happen in Congress after they return to Washington.

The following is a road map to help guide that conversation. In short, Washington should eliminate targeted carve outs in exchange for cutting the corporate tax rate. If the tax base were broadened, then all market players could face a lower rate, not just the federal government’s favorite few.

By giving special tax breaks to their friends, Washington crowds out investment spending in other forms of energy generation. Plus, shifting the burden onto everyone left in the tax base makes it harder for the un-favored to compete. The losers are left to suffer under higher tax rates than their politically connected competitors.

Carve outs for green energies shouldn’t be the only ones on the chopping block. We can't have a truly level playing field unless we get rid of all special exemptions for all energies, including those for oil and gas production. Two credits that we should part with are the Marginal Well and Enhanced Oil Recovery tax credits, which incentivize drilling wells that have little oil left or when development is not economically viable. The cost of obtaining oil from marginal wells often exceeds the market price for that oil, so it makes little economic sense to procure it. It makes even less sense to pay drillers to procure it. These are credits much like the wind production tax credit; both attempt to incentivize production, instead of allowing for legitimate cost recovery.

2. Expense research and development

The government should enact policies that allow for investment in developing energy technologies in a way that wouldn’t pick winners and losers. One way is to allow all energy companies—conventional, green, and all others — to recover their R&D costs by taxing their net income.

A big difference exists between appropriate expensing and deductions and inappropriate targeted subsidies. The former is a cost recovery mechanism that should be available to all businesses; the latter is a direct government incentive that can only be used by the favored few.

Companies would then have an incentive to explore new research technologies, not limiting themselves to the technologies that Washington has picked as supposed “winners” (e.g., wind, solar, ethanol). New technologies would be able to compete for consumers’ dollars on their own merits and on a level playing field, not by petitioning the government for special favors.

3. Cut the federal corporate tax rate

While Washington is coddling its friends in the renewable energy sector with targeted subsidies, it’s also hurting our global competitiveness by enforcing the highest corporate tax rate in the industrialized world. With our combined statutory rate of 39.2 percent, it’s no wonder why we’re hemorrhaging business investment and talent overseas.

Extending targeted tax provisions to companies is a tacit admission that the cost of conducting business in the U.S. is too high. It also admits that allowing companies to hold on to more of their money is good for economic growth. Unfortunately, politicians aren’t tackling the bigger problem. Cutting the corporate tax rate would give American companies an incentive to invest here at home growing the economy and creating jobs — the right way. This would benefit American consumers, workers, and employers, and lead to a faster recovery.

Congress would be wise to take this opportunity to reform the tax code. U.S. energy policy would improve with a  pro-growth tax policy as its foundation and not special favors based on  political connections.

Harbin is a policy analyst for Americans for Prosperity.