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Targeted Tax Credits: Neither Conservative nor Free Market

Posted By Nicolas Loris On February 16, 2012 @ 12:41 pm In Economics | Comments Disabled

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As Congress hammers out the details of the payroll tax extension package, Members on the left and the right are making last-minute attempts to include a number of other provisions, including production tax credits for alternative energy sources [2]. Some republicans are using the “conservatives are the party of lower taxes” to gain support for these tax extensions.

If conservatism is still rooted in free markets, consumer choice, and limited government, then targeted tax credits are not part of the conservative philosophy. They are subsidies that misallocate resources and create the crony capitalistic behavior that Americans loathe.

It works like this: A Member of Congress will say something along the lines of “I introduced and helped pass law X, which will create Y jobs right here in my district.” Without the program, it is more difficult for the policymaker to take credit for job creation. But the fundamental problem is that these taxpayer-funded programs do not create jobs; they shift them from one sector of the economy to the other.

The opportunity cost of government spending is the lost labor and capital extracted from other sectors (ones that do not need government support) of the economy to artificially support the politically preferred ones. Removing the subsidy would free up these resources to be more productive elsewhere in the U.S. economy. Economically speaking, subsidizing inefficient technologies creates a net drain.

But that’s not the only way targeted tax credits misallocate resources. These provisions result in companies spending more money on lobbyists to march to Capitol Hill in support of creating these programs or extending them. Rather than pushing to lower their costs to compete in the marketplace, energy producers attempt to offset their higher costs with taxpayer dollars. This creates an environment where politicians concentrate the benefits with that business and disperse the costs among the taxpayers.

Is it really all that surprising that Members pushing for a wind energy production tax credit hail from Kansas [3], the state with the second most resource potential? Or that the Members championing ethanol subsidies represent the constituents of Iowa, and politicians in Michigan are pushing for advanced vehicle technology loan guarantees and production tax credits?

It’s the nature of a system where an industry’s success depends more on its connections in Washington than on its ability to provide a good product at a fair price. The only way to break up such an inefficient and inherently unfair system is to remove the government’s intervention into the economy.

Such subsidies are not good for the taxpayers, they’re not good for economic growth, and they’re not even good for the long-term viability of these industries. Subsidies create a perpetual state of dependence and prevent the cost-competitive technologies from developing.

The demand to provide affordable, reliable electricity isn’t going anywhere any time soon. Removing the targeted tax credits for all energy sources and broadly lowering the tax rate, as Representative Mike Pompeo (R–KS) and Senator Jim DeMint’s (R–SC) legislation does [4], would create a more market-based energy economy that benefits the economically viable producers and, ultimately, consumers.

It’s time to stop using the tax code to pick winners and losers in the energy sector.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/02/16/targeted-tax-credits-neither-conservative-nor-free-market/

URLs in this post:

[1] Image: http://blog.heritage.org/wp-content/uploads/capitol_building100128-4.jpg

[2] including production tax credits for alternative energy sources: http://dyn.politico.com/printstory.cfm?uuid=A07D7DE1-2E6B-41F0-8472-2741DA21B9A0

[3] pushing for a wind energy production tax credit hail from Kansas: http://moran.senate.gov/public/index.cfm/news-releases?ContentRecord_id=495302b2-5ba7-4ca5-a34e-f70069b81e1e

[4] Representative Mike Pompeo (R–KS) and Senator Jim DeMint’s (R–SC) legislation does: http://www.heritage.org/research/reports/2011/11/real-energy-tax-reform-eliminates-subsidies

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