NPR: Not Particularly Relevant on Energy 'Subsidies'

Few fiscal-policy terms these days seem as elastic as the word “subsidy.” In a strict sense, it means a direct payment from government (i.e., taxpayers) to influence economic behavior.

So it was with great interest that I read Robert H. Schell’s thoughtful post that recently called to “End the Subsidy!” for all forms of U.S. energy. Schell perceptively and forcefully argued that,

I hate all subsidies. In every case they are welfare-reducing for the whole population in the current time period; and I am unconvinced – against all claims – that they are welfare-increasing as a present value of future benefits.

Despite Schell’s making an exception for subsidizing kittens (only a maniac would argue for not subsidizing puppies instead, BTW), his line of reasoning – returning federal fiscal policy to a more economically rational and neutral plane – has plenty of merit. If only the post didn’t cite a flawed report from National Public Radio that has more to do with politics than economics.

According to a September 22 report on NPR’s Marketplace, “[T]oday, federal fossil fuel subsidies in all run about $10 billion a year, more than double those for renewable energy.” This contention seems to assume that renewable energy remains at a federal policy disadvantage – one that’s loaded with half-truths.

As the Government Bytes blog noted several weeks ago, by using the Joint Committee on Taxation’s own (and in our opinion flawed) definition of a “tax expenditure,” renewables are showered with advantages:

Renewables are projected to receive an average of $12.5 billion in “tax expenditures” each year between FY 2009 and FY 2013, while major companies in the demonized American oil and gas industry are slated for less than a billion dollars.

But what about that word behind the numbers: “subsidy”? We have long argued that tax provisions such as credits, deductions, and other “incentives” distort economic decision-making, empower favor-trading politicians, and add to the complexity of the tax system. But allowing people and businesses to keep more of what they earned is hardly a “subsidy,” even if that’s done through those same admittedly imperfect credits, deductions, and incentives.

Indeed, as a recent study from HIS-CERA noted, the U.S. is falling behind in corporate investment toward oil and gas exploration abroad. David Hobbs, author of the report, Fiscal Fitness: How Taxes at Home Help Determine Competiveness Abroad marshaled convincing evidence showing that America’s closest energy development competitors (United Kingdom, Netherlands, Russia, Canada, Norway, Italy and China) “pay less by way of additional taxes on their repatriated income and are therefore able to compete more effectively against U.S.-based companies–in some cases enabling them to afford to bid twice as much for oil and gas concessions.”

For that reason, recent proposals from high-tax lawmakers to repeal the Section 199 deduction and dual capacity credit for U.S. oil and gas firms are especially short-sighted (as noted here in a letter we wrote to Senators).

Which brings us back to Schell’s post. NPR’s irrelevant number-mongering aside, there’s a right way and a wrong way to “end the subsidy.” The wrong way? Ask Senator Bill Nelson(D-FL) and his colleagues who supported Section 199 repeal merely to fill government’s coffers with another $17 billion. The right way? Scrap the entire tax system and replace it with a consumption tax or a single-rate income tax levied on a broad, simple base of economic activities that neither favors nor punishes anyone. Crazy idea, huh?

Want something in between? How about a guarantee that for every deduction, credit, or other incentive Congress repeals, the tax rate is lowered accordingly to prevent Washington from enriching itself any further. That’s the principle behind the “Bipartisan Tax Fairness and Simplification Act of 2010” authored by Senators Judd Gregg and Ron Wyden – an approach that garnered some praise when the legislation was introduced.

Here’s hoping politicians take away the right message from Schell’s blog. But in the likelihood they won’t do so anytime soon, taxpayers will need to keep sending messages of their own, at the polls and long after.