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And That’s Why You Don’t Give Subsidies

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Unread 12.08.11, 01:38 PM
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And That’s Why You Don’t Give Subsidies

On 12.08.11 07:50 AM posted by Nicolas Loris

This past April, when Members of Congress introduced the New Alternative Transportation to Give Americans Solutions (NATGAS) Act that provides preferential tax treatment to subsidize the production, use, and purchase of natural-gas vehicles, the propane industry asked, “What about us?”

Well, someone was listening, because a little over a month later Representatives John Carter (R–TX) and Dan Boren (D–OK) introduced the Propane Gas Act of 2011, which would provide a five-year extension for targeted tax credits for propane as a motor fuel, propane-powered vehicles, and propane autogas—propane converted to fuel for vehicles—refueling equipment. Ben Cardin (D–MD) introduced companion legislation in the Senate.

The introduction of the NATGAS Act and the Propane Gas Act outlines everything that’s wrong with providing targeted tax credits.

Companies seeking special tax treatment justify their handouts by convincing Congress that they need only a small subsidy for a limited time until their technology becomes profitable. Inevitably, successful requests for subsidies beget more requests, and soon the companies call for tax credit expansions or extensions.

Subsidies centralize power in Washington and allow lobbyists and politicians to decide which companies will produce. The more concentrated the subsidy or preferential treatment, the worse the policy is, because the crowding-out effect is larger. Companies will devote more resources to hiring lobbyists to influence politicians in Washington than they will to finding ways to lower costs.

Preferential treatment creates industry complacency and perpetuates economic inefficiency by disconnecting market success from production costs. By artificially lowering the cost of investment, subsidies take resources away from more competitive projects. The fact that other transportation fuels receive government support is not a good reason to continue or expand special treatment for propane, natural gas, or any other alternative fuel. Quite the contrary: It is a good reason to remove those subsidies. And Stuart Weidie, head of the industry group Autogas for America, agrees, saying, “Our position is that everybody ought to have the opportunity for subsidies or nobody should have them.” We prefer that no one have them.

In fact, Solar3D CEO Jim Nelson said that government subsidies are obstructing innovation in the renewable energy sector. In a recent interview with Forbes, Nelson said:

Operating subsidies, or installation subsidies, helps get clean energy sources installed but the problem is that current technology is not economically competitive. Everything we do needs to be done with a view toward global competitiveness. Unfortunately, because current technology is not economical relative to alternatives, it does not promote our competitiveness.

The other common arguments for alternative vehicle fuel tax credits are that they create jobs and will reduce U.S. dependence on foreign oil. Targeted tax credits do not create jobs; they simply shift labor and capital away from one sector of the economy and toward the politically preferred sector. You subsidize something if you want more of it. You’ll see more production of propane-powered gas vehicles as a result of subsidizing them, but what you won’t see is where those resources could have been used elsewhere in the economy.

The co-sponsors of the Propane Gas Act argue that “consumption of gasoline could be reduced by 480 to 683 million gallons per year by 2016.” According to the Energy Information Administration, we used 138.6 billion gallons in 2010—about 379.7 million gallons per day. So, at best we would save a little less than two days’ worth of gasoline consumption.

Members of Congress are pushing to extend and expand a number of energy tax subsidies, but eliminating them would be better for American producers, consumers, and taxpayers. The Energy Freedom and Economic Prosperity Act of 2011(HR 3308) introduced by Representative Mike Pompeo (R–KS) would do just that, while lowering the corporate tax rate to encourage investment and spur economic growth in America. Doing so would allow the most efficient technologies that provide the most value to the consumer to reach the marketplace. It is time to stop using the tax code to pick winners and losers in the energy sector.

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