Another Expansion of Green Energy Tax Credits?

The end of the year policy rush is on in Congress as lawmakers and lobbyists try to hang every pet project onto must-pass bills—usually, government funding bills. This week, a group of House Democrats released a package of green-energy tax credits benefiting wind, solar, and other renewable energy sources. Cleverly named the “GREEN Act,” the bill reneges on a number of previous Congressional deals, allowing businesses and individuals to continue to benefit from overly-generous tax credits

In 2015, the wind industry negotiated a deal with Congress to extend its production tax credit (PTC) for several years. In exchange, the industry agreed that the credit would begin phasing out in 2017, with full expiration in 2020. The GREEN Act would break that agreement, extending the credit another four years to 2024. Several other industries also benefit from the production tax credit, such as open and closed loop biomass, and they would get to ride along with the extension for wind.

So as to not leave solar behind, the GREEN Act also revisits the scheduled phaseout of the investment tax credit (ITC). The ITC was scheduled to fall from a 30 percent credit in 2019 to a 10 percent credit by 2022. The proposal released this week would delay the beginning of the phaseout until 2025. 

The bill also dramatically expands the electric vehicle credit. Under current law, the credit for electric vehicle purchasers begins to phase out when the manufacturer sells more than 200,000 vehicles. Both Tesla and General Motors have sold more than 200,000 vehicles, meaning that beginning in 2020, customers of those two companies will receive a smaller credit than compared to other manufacturers. The bill brings Tesla and General Motors back into the tax credit game, raising the 200,000 vehicle limit to 600,000. 

Other green-energy tax credits are expanded and extended, such as the credit for residential energy efficiency, biodiesel, among others. Notably missing from the bill, however, is what other taxes the authors plan to raise in order to offset the revenue losses associated with extending these credits. Title VIII of the bill is entitled “revenue raisers,” and the description of that section is succinct: “To be provided.” 

Congress should proceed carefully here. As I noted in a recent paper, provisions like those in the GREEN Act “provide special privileges or benefits.” Extending them makes little economic sense since they disproportionately benefit politically favored industries and technologies. And yet Congress has extended and expanded them many times. The wind PTC was created in 1992, and almost 30 years later, the credit continues to find a way to avoid the chopping block.

Economist Milton Friedman one quipped, “nothing is so permanent as a temporary government program”: an apt description for the GREEN Act. Instead of weaning these industries off of tax credits, the bill would reopen previous negotiations, extending and expanding provisions for several more years.