Saturday, September 27, 2008

Penny wise, pound foolish

I don't have any objection to the US Congress' application of so-called "pay-go" rules, a generally good idea, but I scratch my head at the logic (if any) that determines when they are applied.

Nowhere is the gap between the general and the specific more obvious or more arbitrary than the current debate over federal support for renewable energy, particularly the Production Tax Credit (PTC) and the Investment Tax Credit (ITC).

The House and Senate have each passed an energy bill, but there are significant differences in some of the key details and it's unclear what will emerge, if anything, from a yet-to-be-formed conference committee, and whether the President will sign it. Congress is itching to recess for the elections and is probably only still in session because of the financial meltdown unfolding around us. One of the big hang-ups is the question of how to pay for it, i.e. how to offset the revenue loss stemming from these credits. After much kicking and screaming, it seems that some of the revenue loss will be made up by reduction of tax benefits to the oil and gas industry. (Some would call these reductions "tax increases" but what they amount to is fewer tax exemptions. Oil and gas businesses continue to receive substantially greater tax benefits than most other businesses.) The price for getting enough Republican support to (marginally) reduce the largesse to the Fossil Industry is to re-open offshore drilling.

How much do we subsidize the Fossil Industry? In 1995 the Union of Concerned Scientists estimated the tax reductions alone at $2B in 1991. There are plenty of other estimates out there, and I expect there are some which are more current (and probably larger.) It's hard to come up with a single number because it's amazingly complicated to disentangle oil from all other parts of the economy, and some argue that subsidizing oil makes cheaper many other things--from public works projects to transporting organic vegetables. Such calculations also generally ignore the socialized costs for such things as environmental cleanups, increased health problems, climate change, and so on. But the amount of the subsidy isn't my main point--it's the fact that it exists at all.

Do Congress and the President apply pay-go rules every time they dole out another few $B via the tax code to the Fossil Industry? How about for crop subsidies? The war in Iraq? Are they seeking to make the Splurge (the $700B bailout of the credit markets) revenue-neutral? No. While some might argue that the Splurge is an emergency, it is much harder after 5+ years to call the Iraq War an emergency, and the others are clearly not emergencies. They're policies.

So why do we waste time arguing over how to make the relatively tiny renewable energy incentives revenue-neutral when huge outlays get a free pass from budgetary scrutiny under pay-go? The answer is that this is our government's policy.

And what a penny-wise and pound-foolish policy it is.
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