In an op-ed published today in The Hill, Mike Garland and Susan Reilly of the American Wind Energy Association advocated for the long-term continuation of the Production 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. (PTC) for renewable energy. Since the Energy Policy Act of 1992, the PTC has played a significant role in the federal system of energy subsidies, and the authors of today’s op-ed argue that this should continue. They write:
This one 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. credit is the primary federal incentive for wind energy, and provides initial tax relief that has allowed wind industry to scale up against mature industries that continue to get a wide variety of permanent subsidies after up to 100 years. A typical wind farm more than repays all of this short-term tax relief in local, state, and federal taxes over the life of the project.
Here, the American Wind Energy Association has made a bold claim: that the Production Tax Credit for wind energy pays for itself over the long run. Given that industry-specific subsidies in the tax code cost the federal government billions of dollars every year, why do the authors of today’s op-ed think that the PTC is different?
While Garland and Reilly do not provide a source for their claim that the PTC pays for itself, the American Wind Energy Association has previously cited a study from NextEra Energy that purports to show that the PTC results in a “fiscal net benefit to the government of $768 million.” NextEra Energy arrived at the figure in question by estimating the number of additional wind farms created in a year as a result of the PTC, and adding up their total tax payments to federal, state, and local governments over the course of their asset lifetime.
The most important problem with this calculation is the assumption that, if the Production Tax Credit did not exist, the investment capital used to construct wind farms would simply disappear. In fact, federal subsidies to wind power do not create investment out of nowhere; they simply distort the relative cost of producing wind energy, shifting investments from other sectors of the economy to wind projects. If the PTC did not exist, the federal government would lose tax revenues from wind farms, but would gain tax revenues from other economic sectors to which investment would shift. Therefore, it’s simply incorrect to say that PTC pays for itself with the tax revenues from wind farms.
The most charitable account of Garland's and Reilly’s claim is that the Production Tax Credit lowers the average, economy-wide cost of investment, causing some increase in economic growth. But, of course, subsidies to any industry distort market prices, creating economic inefficiencies as well. All in all, it is worth it to be wary of claims that existing provisions of the tax code pay for themselves, especially when the provisions in question exist to favor certain economic sectors over others. This is the case not just for wind power credits but for tax code provisions that subsidize nearly every energy industry in one way or another.
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