Investing

Energy Tax Subsidies Could Top $1.8 Trillion

Adam N. Michel

Biden administration estimates show that the US government could spend more than $1.8 trillion over ten years on energy tax subsidies, if they are made permanent. These costs could increase even further as new regulations, such as the recently finalized tailpipe emissions rule and proposed power plant rule, force greater adoption of tax credit‐​eligible technologies.

The Inflation Reduction Act (IRA) of 2022 marked a significant shift in US energy policy—to one that pairs costly and complicated regulatory requirements with open‐​ended tax subsidies to manipulate consumer and producer incentives toward politically popular energy sources. Since its passage, the estimated cost of the IRA’s new and expanded energy tax credits increased dramatically. Congressional scorekeepers originally estimated the tax provisions would cost $271 billion over ten years. In the months that followed, third‐​party estimates showed that due to higher projected uptake, the cost of the IRA tax credits could be two or three times larger than initially projected.

As part of recent budget estimates, congressional scorekeepers updated the costs of some of the provisions of the IRA. Using these revised estimates, the Committee for a Responsible Federal Budget estimates that the ten‐​year cost of the IRA credits increased by 170 percent, from $271 billion to $736 billion between 2022 and 2031. The IRA also included $132 billion in direct, non‐​tax code energy‐​related spending, in addition to many other changes.

Most of the IRA tax credits are functionally similar to uncapped automatic spending programs. The cost is determined by the credit formula and taxpayer uptake. For advocates of the law, the higher cost illustrates the law’s projected success at inducing investments in targeted energy sources.

Others are worried that the ballooning fiscal cost is unsustainable and could negatively distort national energy markets, investment, and consumer behavior. For example, the tax code has included subsidies for wind and solar energy technologies for more than four decades. Instead of being temporary support for nascent industries—as originally intended—the federal subsidies create sclerotic, subsidy‐​dependent industries that are more responsive to public money than consumer demands.

The IRA is not the entire universe of energy tax subsidies and the tax code included less costly versions of many of the IRA tax credits pre‐​2022. Updated tax expenditure estimates from the Treasury Department as part of President Biden’s fiscal year 2025 budget proposal show that following the passage of the IRA, tax credit subsidies for the energy sector increased 630 percent.

The FY 2024 budget, which did not incorporate the IRA, projected energy tax credits would cost $145 billion between 2023 and 2032. The FY 2025 budget projects a cost of almost $1.1 trillion over the same period, implying the IRA energy tax credits will cost $907 billion over that time.[1] Figure 1 shows the energy tax expenditure cost estimates by year from each budget.

The decreasing cost of the credits beyond 2030 is a product of major expiring provisions between 2027 and 2032. However, Congress often extends these types of tax policies and uses artificial end dates to obscure the true cost. Other tax credits, such as the energy production credit, which phases down based on an economy‐​wide greenhouse gas emission target could be uncapped indefinitely, if those targets are not met.

At peak cost, the energy credits cumulatively reduce revenue by $185 billion a year, implying a permanent ten‐​year cost of more than $1.8 trillion. Table 1 summarizes the major energy tax credits and their costs at various points in time.

Congress should repeal the IRA and the pre‐​IRA energy credits. As a whole, these tax credits are a highly inefficient and expensive system of subsidizing energy from some politically popular low greenhouse gas emitting sources. Energy markets would be better able to meet consumer demand if Congress repealed all of the IRA and pre‐​IRA energy credits. The additional revenues should offset other broad‐​based tax cuts that would benefit more Americans.

[1] This analysis only includes tax credits to avoid confusion with other tax policies, such as expensing, that are not tax subsidies when measured from a consumption tax base. For more on choosing the appropriate references tax base, see Chris Edwards, “Tax Expenditures and Tax Reform.”

You May Also Like

Editor’s Choice

[#item_full_content]

Editor’s Choice

[#item_full_content]

Copyright © 2024 KingOfCashSecrets. All Rights Reserved.

Exit mobile version