Fight Over Natural Gas Heats Up

by Brian McGraw on May 10, 2011

in Blog, Features

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There is a highly controversial natural gas bill floating around the House of Representatives, with over 180 cosponsors, written about here (also here and here).

The Daily Caller’s Chris Moody summarizes the debate:

The measure has 180 bipartisan co-sponsors, including many of the chamber’s most conservative Republican members. But some are crying foul over the special treatment that the government would be providing to the natural gas industry, arguing that it is not Washington’s role to “choose winners and losers” by offering tax credits to promote one energy industry over another. The bill’s proponents, however, say promoting natural gas — a plentiful resource in the United States — will help wean the country off foreign oil, provide resources to alternative energy sources and increase the nation’s energy security.

A coalition of nearly two dozen free-market and conservative groups sent a letter to members of Congress in March urging them to avoid new subsidies and tax credits, and they plan to blast anyone — especially Republicans — who do.

The divide is so deep in fact, that it has even split the libertarian advocacy group Campaign For Liberty, a co-signer of the March letter, with its founder, Texas Republican Rep. Ron Paul, who is co-sponsoring the tax credit bill. Paul discussed his support for tax credits during a recent interview with MSNBC, arguing that they are not subsidies, as his critics would call them, but rather another form of tax reductions.

This debate highlights two important issues relevant to fiscal-conservatives today. The first issue is that it seems obvious that a large number of Republican Members of Congress don’t actually care for fiscal conservatism, at least with respect to the parts of the energy sector they like.
Maybe this isn’t a new phenomena, but its unfortunate because support for any energy “subsidies” undermines legitimate opposition to other energy subsidies that conservatives typically oppose: windmills, solar panels, biofuels, fossil fuel research, etc. If you don’t believe the market has “spoken” concerning the utility of natural gas vehicles, you have to jump through a number of intellectual hoops to avoid the cognitive dissonance of opposition to renewable energy subsidies. While Ron Paul and a select number of other politicians might have “principled” support (misguided, in my opinion), its clear that the vast majority of the Republican and Democrat cosponsors of this bill do not share Ron Paul’s fervent support for reducing the tax burden at all costs.
The second issue is over what qualifies as a subsidy. Ron Paul’s stance is that use of tax policy that involves tax credits is generally okay (I don’t want to say always), as it allows citizens to keep more of their own income, rather than a subsidy which is money given from an already collected pool of government funds allocate for a specific purpose.
In this case, it is worth pointing out the difference between non-refundable and refundable tax credits. Refundable tax credits are credited to any individual or business regardless of whether or not they produce any taxable wealth. For example, an unprofitable business (paying no taxes) that each year bought natural gas vehicles, would still receive a check from the government. Many of the credits in the natural gas bill are indeed refundable, which also undermines Paul’s narrative that these bills only allow citizens to keep more of their money, as they also allow citizens or businesses paying no income tax to receive tax dollars contributed by others.
I understand the emphasis many conservatives place on lowering tax revenue at all costs, but evidence suggests that the negative effects of these tax credits are often much worse than the worthy goal of reducing government revenue.
First, these credits cause enormous distortions in economic activity. Relative to a baseline scenario where no industry is favored, this policy will increase the number of natural gas vehicles. This is treating one industry more favorably than others and moves away from the optimal allocation of resources in society. This is damaging over the long term. This is why there are hundred’s of ethanol processing facilities in the United States, most dependent on tax credits and production mandates.
Second, the actual difference between these tax credits and corporate welfare are semantic, at best. True, individuals or organizations get to keep more of their money. However, keeping this money is contingent upon performing a politically favored activity (purchasing a NGV), which happens to have the same outcome as pure corporate welfare: funneling dollars into certain industries and encouraging all industries to keep coming to Washington for special treatment, rather than focusing on building societal wealth.
Finally, increasing the number of individual carve outs in the tax code actually reduces the likelihood of overall tax reform, the preferable option to all fiscal conservatives involved in this debate. There has recent favorable discussion of corporate tax reform in the media, with possible support from the Obama administration. Yet even if Obama’s agreement is to reduce corporate tax rates while removing deductions (arguably a large improvement from the status quo), he will have hundreds of different industries all fighting to keep their deductions. This is a classic case of concentrated benefits and  diffuse costs. The costs are spread throughout the economy via distortions and deadweight losses, while the benefits are reaped by individuals or corporations who engage in the politically preferred behavior.
There’s little incentive from the vast number of economic actors in society to tackle this problem, and making it more challenging by increasing the number of industries that benefit from our tax code will only make it more difficult.
Support overall tax reform, but don’t support these types of energy tax credits that have negative economic consequences which vastly outweigh the value of reducing government revenue. Reducing government revenue (and through a jumbled, imperfect mechanism government spending) is good, but it cannot be looked at in a vacuum.

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