Who says Washington does not produce? It is a mean subsidy generating machine. Indeed, in the federal government, subsidy begets subsidy, until pretty soon most every industry is on the take, and once on the take, the taking never ends. Welcome to the wonderful world of tax extenders, which is Washington speak for temporary tax subsidies. Congress doles them out to support fledgling industries that are politically popular. But these temporary subsidies seldom die. Instead, Congress keeps extending them time after time and long past when these industries were supposed to be able to fly on their own, without handouts from taxpayers.
Indeed, subsidies can be pernicious. They tempt industries to abandon the desire to innovate their way to profitability and instead focus on keeping the subsidies coming, an easy path to government guaranteed profitability. A package of about 30 tax subsidies could be tacked onto a larger spending bill that could also make important technical corrections to the 2017 tax cuts. This is the type of “must pass” legislation to which many special interests would like to hitch their pet subsidies.
One of these subsidies, a tax credit for biofuel producers, is in an envious position. They have a powerful supporter in Senate Finance Chairman Charles Grassley. A significant share of those subsidies would flow to his home state of Iowa. But the subsidies will not stop with just biofuels. Once biofuels are advantaged with federal handouts, lawmakers will feel pressured to fund other alternative fuels to “level the playing field.”
Lawmakers, and consequently taxpayers, would do better to not subsidize any private businesses. Instead, Congress starts doling out subsidies for wind, for solar, for nuclear, each according to their connections and lobbying prowess. As mentioned, the subsidies do not go away. Take the temporary tax credit for wind power production first passed in 1992. It was supposed to expire in 1999, but instead, it has been extended nearly a dozen times. Another extension is in the works, even though the industry is fully grown. Big Wind wants the same subsidy as Big Solar.
The lobbyists call it a search for parity. Eliminating subsidies for all industries would deliver true parity, but they are not interested in that. What they want are equal preferences their clients can pocket and that lend them a huge advantage over any upstart producers that might want to enter the market. It is not just the alternative fuels corporations that lobby. Last year, the coal and nuclear industries pressed federal regulators to issue price guarantees for their electrical production. One of their arguments? Existing subsidies for renewable energy have made other forms of production uncompetitive. They need parity too!
The feds ultimately turned down the coal and nuke requests, but now some states are providing similar special price guarantees. A large group of House Democrats wants to go even further. They want to expand tax subsidies for energy storage, offshore wind power, and energy efficiency improvements. Many of these programs, just by their very nature, are so complicated that the government agencies that oversee them have been unable to carry out proper enforcement. In one case, a single biodiesel company illegally claimed more than $500 million in tax credits. Another inadvertent loophole in the alternative fuels credit raised the estimated size of the subsidy from $555 million to more than $7 billion.
The most recent addition is an expansion of the electric vehicle tax credit. The industry wants to allow a 400,000 more vehicles per manufacturer to claim a credit of up to $7,000. The Treasury Department reported that this credit had more than $33 million in erroneous claims in one year back in 2011. This includes people who claimed electric vehicle tax credits for their Hummers and Jeeps. In a report this year, the Treasury Department identified more than 16,500 taxpayers who received nearly $74 million in potentially erroneous credits. The Internal Revenue Service simply is not up to the task of administering numerous complicated tax credits.
So the subsidies continue as wasteful and unnecessary. The desire to make small corrections to the 2017 tax cuts and possibly some limited retirement changes could motivate more lawmakers to support a host of these misbegotten extenders. Good policy should stand on its own, not be held hostage by the selfish pleadings of special interests.
Adam Michel is a senior policy analyst focused on tax policy issues with the Grover Hermann Center for the Federal Budget of the Heritage Foundation.