Principled energy tax reform

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The advanced energy industry has grown to a $1 trillion global marketplace, and tax policy can help or hinder the success of U.S. companies and workers in that global competition. As Congress begins to grapple with comprehensive tax reform, it is essential to base energy tax policy on business-focused principles that benefit the economy, consumers, and the nation.

Energy tax reform should focus the tax code on a core public purpose – developing innovative technologies that make U.S. energy more secure, clean, and affordable. Tax provisions serving this purpose should be targeted, performance-based, and technology-neutral – and they should go away when no longer needed.

Existing energy tax incentives should be gradually phased out and replaced with a new structure based on explicit and consistent principles. Based on conversations with business leaders, tax policy experts, and members of Congress, we believe energy tax incentives should and can:

1 - Be targeted to driving innovation. Rather than providing permanent support to mature industries that already dominate the market, the federal government’s role should be limited to driving innovation and commercializing the next generation of technologies that promise public benefits. Such benefits include reducing enhancing energy security, protecting public health, and holding down energy costs for consumers and businesses.

2 - Sunset or update automatically when market-based objectives are achieved. No company or technology should be entitled to permanent subsidies.  When left in place too long without adjustment, tax incentives distort price and market signals and create barriers to entry. They should remain in place only long enough to reach a measurable, market-based objective – getting emerging technologies to a point of sufficient maturity to stand on their own.

3 - Provide stability and certainty for businesses and investors. The duration of some current energy tax provisions, including production tax credits and investment tax credits, is determined by expiration dates that are short-term and unrelated to market conditions. When credits are allowed to lapse, only to be renewed, the result is a cycle of boom and bust. Using meaningful performance metrics tied to maturity in the marketplace, rather than calendar deadlines, to sunset tax benefits would provide certainty to investors, focus businesses on bringing their technologies to scale at lower cost, and allow market dynamics to determine business success.

4 - Be technology neutral to support all forms of advanced energy. Many of today’s energy tax policies were written with one sector – whether oil or wind or coal or solar – in mind. This technology-specific approach distorts market signals, is inefficient, and imposes unnecessary risk on taxpayers. Energy tax benefits should be applied as broadly as possible to stimulate innovation across technologies, including those that have not been developed yet.

These four principles would put federal tax policy squarely behind energy innovation that can take off in the marketplace and meet vital national goals.  They also represent a dramatic break from the status quo. Of the 26 existing energy tax provisions, not a single one meets all four of these principles; in fact, none meet more than two. It is no wonder that members of Congress from both parties, and an increasing number of advanced energy business leaders, say it’s time for reform.

Turning these principles into law won’t be easy. But doing so would make federal energy tax policy more accountable and frugal – producing budget savings and secure, cleaner, affordable energy choices to fuel a vital and growing 21st Century advanced energy economy.

Richard is CEO of Advanced Energy Economy (AEE), a national business association.