Just a few days after our previous post outlining the ethanol industry’s brave, unprecedented, legendary, and 100% voluntary decision to give up the ethanol tax credit, we see that there are still other subsidies that they are interested in keeping:

But the head of the Renewable Fuels Association—Bob Dinneen—says the industry will work to ensure that tax credits for cellulosic ethanol will continue past the end of 2012.

“We think that the production tax credit and the depreciation that is now allowed for cellulose needs to continue,” Dinneen says.

Extension of the cellulosic tax credits will send an important signal to the marketplace and encourage investment in the next generation of ethanol technology, Dinneen says.

And to those who consider it just another federal subsidy for ethanol…

“They need only look at the tax incentive for grain-based ethanol that has just expired–that demonstrates you don’t need a tax incentive forever,” Dinneen says.

“You need to encourage investment—convince the marketplace that there is going to be consistent government support that will allow the industry to get on its feet.”

Cellulosic ethanol has not yet been produced commercially, but according to the U.S. Department of Energy web site, several commercial cellulosic plants are under construction.

Not including the federal mandate for their product or various state-level incentives, the ethanol industry has been federally subsidized in some form for over 3 decades. Just think, at this pace, after another 2-3 decades of timely, critical subsidies for the cellulosic ethanol industry they might be able to make a tiny dent in our oil consumption. What a bargain!

With the current partisan fighting over oil subsidies (and energy policy more generally), its worthwhile to look at energy legislation that has found bipartisan support: the New Alternative Transportation to Give Americans Solutions Act of 2011 (the NAT GAS Act, often called the Boone Pickens bill). It currently has 180 cosponsors, split roughly even between Republicans and Democrats. Joe Nocera likes it.

True fiscal/small government conservatives understand the danger of using the tax code to steer the economy. It has brought us ethanol, subsidized home ownership for the wealthy, etc. Populist conservatives-in-name-only don’t actually care about applying consistent principles, or often let their concern be overshadowed by campaign donations.

Which is why I was surprised to see Representative Ron Paul, principled libertarian/free-market extraordinaire, as a cosponsor. I spoke to someone in Ron Paul’s office, and they explained (roughly) that support for tax credits (i.e., industries paying less in income tax relative to the status quo) is consistent with Ron Paul’s support for lower taxes.

This YouTube clip seems to explain Paul’s position (he was asked about a bill to end tax credits for the oil industry):

PAUL: Well, how do you define a subsidy? I don’t consider any tax break as a subsidy. That was not a spending bill, that was not a grant.

…

I never vote to increase any taxes. I vote to always give tax credits, and I always cut spending. I’ve never voted for a real spending bill, so, I don’t think that is in the category of something I’d consider a spending bill.

Essentially, Paul’s position appears to be that any move to lower taxes is a good move. This position isn’t unique to Ron Paul. This post examines a similar fight over whether or not repealing the ethanol tax credit amounts to a tax increase that would violate a pledge to oppose tax increases endorsed by many conservatives. However, I think that supporting selective tax credits for industry is bad policy, and has the effect of steering the economy, something Paul doesn’t support:

Government cannot invest, it can only redistribute resources. Just look at the mess government created with ethanol. Congress decided that we needed more biofuels, and the best choice was ethanol from corn. So we subsidized corn farmers at the expense of others, and investment in other types of renewables was crowded out.

Now it turns out that corn ethanol is inefficient, and it actually takes more energy to produce the fuel than you get when you burn it. The most efficient ethanol may come from hemp, but hemp production is illegal and there has been little progress on hemp ethanol. And on top of that, corn is now going into our gas tanks instead of onto our tables or feeding our livestock or dairy cows; so food prices have been driven up. This is what happens when we allow government to make choices instead of the market; I hope we avoid those mistakes moving forward.

Flex-fuel vehicles, capable of running on 85% ethanol blends, mostly exist because of government policy (note, not technically due to a tax credit), and are largely considered to be a government-science-experiment gone wrong. Electric vehicles largely only exist because of enormous tax credits. This natural gas legislation will result in increased production of natural gas vehicles.

Paul wants to get rid of the income tax. Great. But is it a good idea to lower taxes (often at the behest of industry who come begging to Washington) in a piecemeal fashion? Given the constraints of a corporate tax rate already in place, lowering taxes for specific industries would seem to do more harm than good.

(Curiously, Paul has voted against tax credits for renewable power before. Note that these bill summaries don’t always explain the entirety of the bill, and Paul often will vote against bills for small provisions on principle, so this might not be inconsistent.)

Imagine two pizza companies competing against one another. Now allow one company to pay zero dollars in corporate taxes. They now have an unfair advantage and can potentially force the other company out of business via lower prices. Now phase that up into enormous industries like the natural gas, coal, or oil industry. Allowing these industries to pay lower taxes relative to one another distorts the most efficient use of our energy resources.

Cheers to Ron Paul for opposing subsidies. And I understand the difference between a “subsidy” where the government gives you money, and a “tax credit”, where you get to keep more of your own hard earned money. However, in the macroeconomic sense, the destructive outcome of either a tax credit/subsidy is often the same. Aim for overall corporate tax reform, not more individual deductions or credits that further distort economic activity.

And shame on all of the cosponsors on those bills who pretend to ideologically oppose picking winners, or who consistently vote against the same type of energy tax credits for industries that are less popular with their constituents.