United States: Senate Finance Committee Debates Energy Tax Policy

Last Updated: June 27 2016
Article by James Mann and Steven D. Lofchie

Most Read Contributor in United States, September 2017

The U.S. Senate Finance Committee debated energy tax policy at a hearing titled "Energy Tax Policy in 2016 and Beyond."

Senator Ron Wyden (D-OR) called on Democrats and Republicans to "come together, take care of these energy extenders and clear the decks" of "leftover business that needs to be addressed" before the end of the 2016 round of expirations. He asserted that the key to a new long-term approach to energy policy is to implement a "technology-neutral" plan to replace "today's web of 44 energy tax breaks" with "three incentives built around simple, clear goals – cleaner energy, cleaner transportation and energy efficiency." "[T]he price tag of today's system – $125 billion every decade will be cut in half," he said. Senator Wyden offered the following rationale for his proposals:

Innovators see enormous economic opportunity in renewable energy. Our energy tax policies have to keep up. Let's not cling to yesteryear like the naysayers who saw the first automobiles hit the road a century ago and said no, "the horse is here to stay." Let's put policies in place that support those who are at the forefront.

Senator Orrin Hatch (R-UT), Finance Committee Chair, expressed "serious concerns" about the way the Obama Administration has overseen the use of subsidies it designed to promote alternative energy. "Ultimately, the energy-related provisions in our tax code – like everything else – will have to be reconsidered as part of our ongoing tax reform efforts" he said. Further, Senator Hatch stated: "we need to work to ensure" that the tax code is designed not to "punish the production of any viable energy source."

Susan Kennedy, Founder and CEO of Advanced Microgrid Solutions, an energy storage company, testified that "federal tax policy is the single most important tool to attract investment in critical infrastructure, including the electric grid." She stressed that "providing targeted and efficient incentives for truly innovative, source neutral technologies like energy storage will spur competition and attract the private investment we need to build a more resilient and efficient grid, help control electricity usage and costs and move towards energy security and independence."

Benjamin Zycher, American Enterprise Institute Scholar, declared in his report that the goal of energy "independence" – the degree of self-sufficiency in terms of energy – is "irrelevant analytically." He argued that the following "modern rationales for energy subsidies" suffer from "fundamental analytic weaknesses":

  • support for infant industries;
  • leveling the subsidy playing field;
  • avoiding the adverse external effects of conventional generation;
  • reducing resource depletion, or increasing "sustainability";
  • employment expansion through the creation of "green jobs"; and
  • using the "social cost of carbon" to determine environmental benefits.

Mr. Zycher asserted that "Resource allocation in energy sectors driven by market prices is roughly efficient in the absence of two compelling conditions: (i) some set of factors has distorted allocational outcomes to a substantial degree; and (ii) government actions with high confidence will yield net improvements in aggregate economic outcomes." He stated that "Given the weak history of analytic rigor and policy of energy subsidies, greatly increased modesty on the part of policymakers would prove highly advantageous."

Commentary James Mann

Last week's Senate Finance Committee hearing on energy tax policy was driven, at least in part, by the poor drafting of the December tax credit extenders bill. Some renewable energy tax credits were omitted from the December extensions (e.g., the credit for small wind generators). As a result, some in the renewable energy community are looking for another tax bill to address these omissions before the election.

There is a wide divergence of opinion on how to move forward. Senator Wyden, the ranking minority member of the Senate Finance Committee, is an enthusiastic proponent of renewable energy subsidies. The Senate Finance Committee Chair, Senator Hatch, is considerably more skeptical. By the testimony presented at this hearing, it is evident that there are many challenges to the formulation of a coherent national energy policy, particularly when attempting to change economic behavior through revisions to the Internal Revenue Code. A good overview of the underlying issues is provided by an American Enterprise Institute's 26-page paper examining the rationales advanced for governmental renewable energy support.

Commentary Steven Lofchie

The Senator from Oregon boasts that his tax proposal will benefit an energy company based in his home state. While it is possible that tax subsidies that benefit a legislator's state, district or constituents are also good for the nation, such specific tax subsidies raise broad public policy questions. They also reflect some of the forces at play in the debate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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