Clean Energy Bill Threatens to Pollute Tax Code

June 23, 2005

Despite the President’s call for tax simplification and reform, the Senate is poised as early as today to approve a sweeping energy bill that will dramatically complicate the federal tax code.

The bill—The Energy Policy Tax Incentives Act of 2005 (PDF)—is brimming with complicating tax credits, deductions, and special provisions aimed at distorting normal market outcomes and carrot-and-sticking individuals and companies toward alternative energy sources.

By one count from Villanova tax professor James Maule, the bill includes 12 new income tax credits, 2 new excise tax credits, 6 modifications and expansions of existing credits, 3 credit sunset extensions, 3 new tax deductions, one modification of an existing deduction, and 2 other tax provisions.

Removing barriers to the development of alternative energy sources is a laudable policy goal. But actively promoting it through distortionary preferences in the tax code? Writes Prof. Maule:

The notion that American businesses and individuals will conserve energy and switch to more efficient, less expensive forms of energy only if bribed with tax credits is appalling… [T]o rely on tax incentives to get people to do what they ought to be doing, and very well might already be doing, is wrong…

Congress apparently thinks that the IRS is the most efficient federal agency to operate energy and other grant programs disguised as tax credits. Yes, the same Congress that publicly bashes the IRS in order to “get” votes turns around and entrusts administration of its energy program to the IRS.

As Prof. Maule notes, in recent decades Congress has increasingly relied on the tax code to implement social policy, rather than direct spending programs.

Why? Because spending programs are typically much more visible—and thus subject to more scrutiny—than tax preferences, which can be concealed within the complexity of the federal code.

In this sense, implementing social policy through the tax code is much more efficient for legislators than creating new spending programs whose budgets are transparent and subject to debate. But it creates terrible tax policy incentives that threaten to make a complex and inefficient tax code a long-term equilibrium. And as some legislators have candidly admitted in the past, a tax code designed to guide economic outcomes rather than raise revenue is not appreciably different from wholesale central economic planning by a different name.

As we’ve written before, so long as we insist on using the tax code to achieve social goals beyond raising revenue for necessary government programs, it may be impossible to achieve true tax simplification.

Update (6/29): The Senate bill was passed yesterday. Here’s a summary of some of it’s provisions that promise to complicate the federal tax code.


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