Chairman of the Senate Finance Committee Max Baucus (D–MT) released a draft bill to reform the way the tax code treats energy. This latest draft reform plan misses the mark, just like his earlier efforts on international tax and depreciation did.
Baucus claims that his plan would stop the tax code from picking energy winners and losers, but it would only change who wins and who loses as constituted under current law.
The plan would consolidate the many energy tax credits in the current tax code into two: one for electricity producers and one for transportation fuel producers. Producers could claim the credits, through either their production or on their investment in production facilities, only if the energy they produce is 25 percent less greenhouse-gas-intensive than their industry average.
The credits do not favor any particular energy technology, but they would tilt the energy market in favor of carbon-free energy and away from carbon-based energy because only carbon-free producers are likely to meet the arbitrary metric the plan chose.
This would provide a market advantage to carbon-free forms of energy because, after the tax credits, those forms would be less expensive to consumers relative to carbon-based forms. In effect, the credit would provide preferential treatment to renewables, biofuels, electric vehicles, nuclear, and even natural gas while punishing coal and oil producers.
The real loser with this tax policy would be American families. Rather than using the most affordable, reliable energy to light and heat our homes or to get us to work every day, we’d be using the politically preferred sources. The market should drive the most efficient technologies that provide the most value to American families and businesses to reach the marketplace. It should also produce energy based on other attributes, such as being carbon-emissions-free, if consumers indicate that as a preference and market demand exists.
Taxes should never be used to pick winners and losers. True free-market energy policy would allow all energy sources and technologies to compete on equal footing, not tilt the market in favor of one form or another.
Tilting of the market in favor of carbon-free forms of energy would achieve the same end goal as a tax on carbon, although in reverse. A carbon tax would make the production of carbon more expensive, which would drive its price higher, thereby giving an advantage to carbon-free forms of energy. The Baucus plan does not actively raise the production cost of carbon-based fuels but instead confers a benefit only to carbon-free forms. The end result in either scenario is that carbon-based energy would be more expensive relative to carbon-free energy.
Senator Baucus is correct when he says we need an energy tax policy that brings us into the 21st century, but this proposal does not get us there. Congress should instead remove all targeted tax credits for all types of energy sources and technologies and offset that with a broadly lower tax rate.