Obama’s Budget: Central Planning the Nation’s Energy Sources

In American political discourse, everyone pays lip service to the virtues of free-market capitalism, and everyone recognizes the disaster of outright socialism. Yet through its massive power to tax, spend, and regulate, the federal government can achieve backdoor central planning, where federal officials pick winners and losers. We see this pattern all too clearly in President Obama’s recent budget proposal and its impact on the American energy sector.

Throwing Money at the “Immature” Technologies

The most obvious example of government interference in energy markets is its explicit use of tax dollars to fund alternative energy sources. As The Hill reports:

The budget calls for $8 billion in investments in clean energy research and development, including $5.4 billion for the Energy Department’s Office of Science and $457 million for solar energy research. Meanwhile, the budget cuts funding for the Energy Department’s fossil energy budget by 45 percent.

“Looking at the budget, it looks like some resources will be advantaged over others,” said Sen. Lisa Murkowski (R-Alaska), the ranking Republican on the committee.

…

“It seems to me that within the administration, you are picking those areas through the budget process that you would like to see advanced,” Murkowski said.

But [Secretary of Energy Steven] Chu stressed that the administration’s “clean energy standard” proposal will be “technology-neutral.” He said the budget reflects an effort by the administration to increase funding for technologies that have not yet matured.

“If you look at the history of the United States, there are mature technologies and there aretechnologies that need more help,” Chu said, adding that oil and natural gas are “mature technologies” and solar needs additional research and development. [Bold added.]

Of course, in this context what Secretary Chu means by “mature” is: an energy source able to stand on its own in open competition. Solar and other forms of energy that are dependent on government support are immature in the sense that they would not pass the market test.

Secretary Chu’s terminology is misleading in another respect: It’s not as if scientists dreamed up the idea of harnessing the sun’s energy last summer. No, solar, wind, and other “immature” technologies have been on the government dole for decades. They are not infant industries, but instead are 35-year-olds with no job who still live with their parents.

In order to truly level the playing field and allow entrepreneurs to serve consumers with the best and cheapest energy options, the federal government doesn’t need to give handouts to all technologies. Instead, the government needs to stop trying to steer the energy sector altogether. By all means, cut funding for fossil fuel sources, but cut funding for their competitors as well.

Those who oppose subsidies for “alternative” energies don’t have a vendetta against renewables, nor do they harbor a grudge against the climate. The simple fact is that fossil fuels are currently the most efficient means of delivering energy to American consumers and businesses in a convenient form, in most applications. The government doesn’t need to ratify this fact; it needs to stand back and let market forces decide which technologies are viable, and which are truly immature and therefore should not yet be deployed.

We Told You the EPA Was Hurting Job Creation

The debate over the proposed budget yielded some revealing comments from EPA Administrator Lisa Jackson. Bloomberg reports:

Obama’s budget counters a proposal from Republican lawmakers in the House to slash EPA funding by $3 billion and block the agency from regulating greenhouse gases from industrial polluters such as power plants. The president’s plan calls for about $43 million in new funding for the rules aimed at curbing carbon-dioxide emissions blamed for climate change, according to EPA Administrator Lisa Jackson.

“We need to get started,” Jackson told reporters on a conference call today. “Businesses are waiting right now to make investments, and one of the things they need to know is how we will be addressing carbon pollution going forward.” [Bold added.]

Although she is trying to put a positive spin on the situation, Jackson is implicitly conceding that the threat of new regulations on emissions is stifling investment and its related job creation. As we pointed out in an earlier post, the EPA is not helping the economy, despite the flawed study suggesting otherwise.

Closing Loopholes or Raising Taxes?

For those wishing to see a return to market outcomes in the energy sector, the convoluted federal tax code raises thorny dilemmas. Given that the federal government is going to levy taxes, most free-market economists agree that the ideal system would be a flat rate (perhaps on “consumption” as opposed to “income”) with no deductions or exemptions. By having no “loopholes,” the single bracket rate could be as low as possible, for a desired amount of revenue collection. The low marginal tax rate would then minimize the distortion that the tax code would have on investment, hiring, and other business activities.

Unfortunately, the current federal tax code has graduated brackets and a bewildering array of special exceptions. Businesses have adapted to the current landscape, and if the government “simplifies” the tax code by “closing loopholes”—especially if the move is not tied to a reduction in the tax rates in various brackets—then the government is unambiguously imposing a tax hike. The free-market economist’s goals of a simple tax code, and a low overall tax burden, come into conflict.

Beyond these problems, there is the danger of government abuse, when it can use the tax code in a punitive way to “soak” groups that the public views as having Deep Pockets. Consider the Obama budget’s proposals to extract more revenues from oil and gas companies. Many superficial analyses simply refer to the proposals as “closing loopholes,” but an accounting website shows that the matter is far more nuanced.

Among the reductions in tax breaks for the coal industry are the expensing of exploration and development costs, and the domestic manufacturing deduction and percent depletion for hard mineral fossil fuels. For the oil and gas industry, the budget would repeal the enhanced oil recovery credit, the credit for oil and gas produced from marginal wells, expensing of intangible drilling costs, percentage depletion for oil and natural gas wells, and the domestic manufacturing tax deduction.

Although accounting can sometimes be an art, rather than a science, many of these items—such as depletion of reserves and intangible drilling costs—are legitimate expenses, and ought to be recognized properly by the tax code.

What’s worse, to exempt only the oil and gas industries from eligibility for the domestic manufacturing tax deduction, is clearly a case of using the onerous tax code to punish some firms and reward others. The ostensible purpose of the tax deduction was to give an incentive for firms to “keep jobs in the U.S.” rather than outsourcing them. If the government has now decided that this is no longer a worthy project, then they should end the deduction for all currently eligible firms, not simply the “rich oil companies.”

Conclusion

In general, the Obama Administration’s budget proposal follows the standard pattern of taxing energy sources that work, and subsidizing those that don’t. If the government really wants to get serious about cutting the deficit, creating productive jobs, and protecting Americans from rising energy prices, it should get out of the energy sector altogether. If the government stopped subsidizing some companies, and if it stopped designing arbitrary tax rules to penalize others, then the most efficient energy sources would flourish in an open and competitive marketplace.