Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, has recently released a proposal for energy tax reform. In general, the proposal is meant remove a patchwork of energy taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credits and replace them with two energy tax credits for electricity and fuel.
While Baucus does take steps to simplify the tax code by eliminating some corporate welfare tax provisions, it completely misses the mark. There is an inherent tension between Baucus’s earlier position of advocating against picking winners and losers through the tax code and this proposal that gives special treatment to clean energy companies. Additionally, it essentially puts the EPA in charge of tax policy. And, most importantly, it ignores what is really important in tax reform: growing the economy.
Repeals Eleven More Energy Tax Provisions
Senator Baucus proposes to eliminate ten energy tax credits (Table 1). Most of these provisions account for relatively little revenue loss according to the JCT. In total, the JCT estimates their value at $10.65 billion over five years (2013 – 2017).
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Table 1. Repealed Energy Tax Provisions Under Baucus's Proposal |
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Tax Provision |
Revenue Gain (2013 – 2017) |
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Credit for Residential Energy Efficiency |
$4.8 billion |
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Credits for Fuel Cell Motor Vehicles |
$100 million |
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Credits for Electric Plug-in Vehicles |
$2.5 billion |
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Credit for Enhanced Oil Recovery Costs |
Negligible |
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Marginal Well Production Credit |
Negligible |
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Mine Rescue Training Credit |
Negligible |
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Carbon Dioxide Sequestration Credit |
* |
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Credit for Construction of Energy-Efficient New Homes |
$100 million |
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Credit for Energy Efficient Appliances |
$600 million |
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Credit for Investment in Advanced Energy Property |
$1.3 billion |
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Treatment of Gain Resulting From Federal Energy Regulatory Commission Restructuring |
$1.1 billion |
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Estimated Value of Energy Tax Credits |
$10.65 billion |
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*JCT Considers this a tax expenditure, but "projected revenue changes are unavailable." |
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Source: Joint Committee on Taxation Note: Tax expenditures with negligible values are set to $50 million. Values could be lower. |
Also keep in mind that the tax administration and cost recovery discussion drafts outlined 11 additional tax provisions related to energy as well.
Consolidates Remaining Energy Tax Provisions into Two New Credits
Senator Baucus proposes to consolidate three existing tax credits for electricity and one for fuel into two new tax credits. These tax credits will be available to businesses that produce either electricity or fuel that is deemed to be 25 percent cleaner than the average for all electricity or fuel production facilities. The cleaner the electricity or fuel generation is relative to the average, the larger the credit.
The Environmental Protection Agency (EPA) will be put in charge of determining whether a business meets the cleanliness standard.
Businesses would be able to choose to use this credit as either a production credit (credit per unit of production,) or an investment credit of up to 20 percent of the cost of the investment.
It is unknown how much these provisions will cost. However, the discussion draft says that these provisions, combined with the provisions in Baucus’s cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. and international proposals, are revenue neutral.
A Contradiction in Baucus’s Position
There is an internal contradiction in Senator Baucus’s position on tax policy. In this draft and previous discussion drafts, he states that he does not want to pick “winners and losers” through the tax code. In other words, he does not want to give favorable tax treatment to one business over another. However, this entire draft is devoted to just that. The two energy tax credits he proposes gives subsidies in the form of credits to specific businesses for specific business activity.
Gives the EPA Power over Tax Policy
Baucus’s plan would place the Environmental Protection Agency in charge of determining whether businesses are in compliance with the clean energy tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. ’s standards. It’s not clear exactly how the EPA will determine whether each business that applies for the credit is eligible or not. This also seems like it will increase the administrative burden of the tax code. Businesses applying for credits will need to deal with the EPA in addition to the IRS with regard to their taxes and meeting cleanliness guidelines.
Baucus’s Proposal Misses the Point of Tax Reform
Overall, his proposal misses the point of tax reform. Tax reform should not be about finding the “right” industries to subsidize and which ones to tax. This just shifts money from potentially productive activities to politically preferred activities, regardless of their economic benefits.
Tax reform should be about making all Americans better off. Policies that create economic growth, increase wages, and increase living standards should be pursued in any fundamental tax reform package.
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