1Center or American Progress | Good Government Investments in Renewable Energy
Good Government Investmentsin Renewable Energy
Fair, Effective, and Efficient Tax Policy Is Keyfor Driving Renewable Energy Growth
Richard W. Caperton January 2012
Introduction
Budge decis drove he conversaion in Washingon in 2011 wih he daily newsdominaed by governmen shudown hreas, he “super commitee,” coninuing reso-luions, and arcane budgeing pracices. Unorunaely, his le Americans convincedha governmen invesmens in he uure are o he able because o large ederal budge decis ha need o be reduced. Americans were misled. As he Cener or American Progresspoins ou , he UniedSaes can balance our budge, reduce our long-erm deb, and make key invesmens inour uure all a he same ime. CAP’s plan works oward a more vibran economy whereall Americans are beter o and clean energy is an inegral par o his uure. Bes o all,he invesmens ha governmen needs o make are relaively modes and can be paidor by ending waseul spending in he same energy secor.Tere is no doub ha Americans need clean energy because i’s vial o our naion’seconomic compeiiveness, securiy, and healh.Tere is also no doub ha governmen will play an imporan role in making heransiion o clean energy. Why? Because he ederal governmen always has been—and always will be—a player inenergy markes. Te ederal governmen has made invesmens in energy or more hana cenury, by graning access o resources on public lands, helping build railroads and waerways o ranspor uels, building dams o provide elecriciy, subsidizing exploraionand exracion o ossil uels, providing nancing o elecriy rural America, aking on risk in nuclear power, and conducing research and developmen in virually all energy sources.Tere’s no reason ha Washingon should sop making new invesmens.
2Center or American Progress | Good Government Investments in Renewable Energy
Considering he hisory, governmen invesmen has led o amazing developmens,including universal access o reliable and aordable elecriciy, lasing economic devel-opmen, and indusrial growh. Tis success sory alone could jusiy coninued govern-men engagemen o vibran energy markes. When we consider ha invesmens in clean energy are invesmens in America’s uure,i’s clear ha he smar choice is o make hese invesmens o mee he nex genera-ion o energy challenges and o produce a oundaion o aordable, reliable, and cleanenergy alernaives or uure waves o invesmen and opporuniy. A he same ime we can no longer aord indiscriminae or waseul subsidies. I is essenial ha govern-men’s invesmens in energy be air, eecive, and ecien.Tis issue brie examines how he governmen currenly invess in renewable energy, whenhose invesmens are eecive, and how hose invesmens should work in he uure.
Energy and the tax code
Te ederal governmen has a suie o ools a is disposal o make invesmens, includ-ing cash grans, regulaory incenives, ax expendiures, and nancing suppors. Whenproperly designed and argeed, each o hese ools plays an imporan role.In he energy secor mos governmen invesmen happens hrough he ax code.Indeed, or energy companies ha receive ederal suppor, he mos imporan day o he year is ax Day, when hey receive a large amoun o heir governmen benes.In ac,44 perceno energy spending in 2010 was hrough he ax sysem, wih heremainder hrough oher ools.Tere are boh good and bad reasons or his. Boh companies and he governmenhave an esablished sysem or paying and processing axes, so providing invesmenshrough he ax code provides or ecien delivery o incenives by apping exisinginrasrucure and rules. More cynically, however, ax expendiures are an expedienha may be a cross-purposes wih good governmen pracice because hey are heldo dieren budge sandards han direc spending. Tis means ha working hroughhe ax code is less ransparen and hereore ar easier o pass hrough Congress wihreduced budge scruiny.Tese issues are discussed in deail in he CAP repor “Governmen Spending Undercover:Spending Programs Adminisered by he IRS” by Lily Bachelder and Eric oder.ax expendiures are governmen spending programs ha deliver subsidies hroughhe ax code via special ax credis, deducions, exclusions, exempions, and preeren-ial raes. While he acual implemenaion can be complicaed, ax expendiures are
3Center or American Progress | Good Government Investments in Renewable Energy
economically he same as direc spending boh or he governmen and or beneciaries. Wih direc spending, he governmen brings in ax money and hen spends i, while wih ax expendiures he governmen simply reduces he axes ha a company owes.Eiher way, he company has more money and he ederal governmen has less.
Tax expenditures should be held accountable for achieving results
Te underlying reasons or so much energy spending being done hrough he ax codeare unlikely o change, a leas in he shor erm. Tereore i’s imporan ha energy ax expendiures work well. Inprevious CAP work we’ve called or regular reviews o all ax expendiures o ensure his spending is eecive, ecien, and necessary.Tere are some energy ax expendiures ha clearly do no mee his sandard. SimaGandhi and I wroe in deph abou his issue in“America’s Hidden Power Bill ,” where we described obscure ax credis or he oil-and-gas indusry ha have exised or morehan 80 years and have no demonsrable benes or Americans. Such ax breaks simply provide windall benes o hese maure indusries a axpayer expense. We also dis-cussed several ax credis or clean energy ha are much beter designed.Tis issue brie calls or Congress o ake acion on some o he mos imporan cleanenergy ax issues in oday’s policy and poliical debaes: he producion ax credi, heinvesmen ax credi, and he reasury Cash Gran Program. Each o hese can beexended in a way ha boh leads o powerul incenives or invesmen in our energy uure and represens good ax policy.Finally, i’s imporan o noe ha each o he hree primary issues is signican or adieren reason. Because renewable energy sources have dieren characerisics hey require dieren reamens wihin he ax code. Simply exending he producionax credi is no sucien. Neiher is exending he reasury Cash Gran Programnor improving he invesmen ax credi. Congress needs o do
all
o hese hings. I Congress only akes acion on one o hese, hey will in eec be “picking winners”across echnologies.Congress should insead ocus on a comprehensive invesmen package ha creaespahs or all echnologies so ha American businesses will inves in he echnologiesha make he mos sense or our counry.
Three ways to invest efficiently and effectively
Forunaely, we already know some o he bes ways or he ederal governmen omake meaningul invesmens. Trough eecive and ecien use o he ax code, he
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Good Government Investments in Renewable Energy
Richard W. Caperton looks at how the government currently invests in renewable energy and ways to make that spending more efficient and effective for a more competitive, healthy, and secure United States.
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