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Investing in our Clean Energy Economy

SOURCE: AP/Susan Montoya Bryan

The recently introduced SEAM Act would expand a manufacturing tax credit for clean energy companies like Schott Solar in Albuquerque, New Mexico, which manufactures photovoltaic panels.

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See also: Visiting China, Seeing Green: Updates from the Trip

New manufacturing jobs play a key role in fighting unemployment. The jobs numbers released today indicate job creation in the manufacturing industry continues to lead the economy’s recovery, with 101,000 new jobs added since December, including 44,000 new jobs last month. These figures support what the Center for American Progress has long argued for—our nation needs to transition to a clean energy economy, in which manufacturing plays a large part, so we can create millions of new jobs for Americans. Our report, "The Clean Energy Investment Agenda" explains why a comprehensive approach to energy and climate that includes market-driven clean energy incentives, a variety of financing vehicles, and infrastructure investments is the key to the clean energy future.

The newly introduced Security in Energy and Manufacturing Act speaks to one critical piece of this puzzle. The SEAM Act provides financial assistance to U.S. manufacturing companies that want to retool their factories for the clean energy economy. By promoting growth of the manufacturing sector, this legislation has the potential to create badly needed jobs that can put Americans back to work.

The United States needs a strong manufacturing sector in order to compete in the clean energy economy. China already has policies that promote its green manufacturing sector. On a recent trip to China, CAP energy experts spent several days touring solar, wind, and battery manufacturing plants. What we found was a country intent on expanding capacity of its existing infrastructure—particularly in computer chips and cell phone batteries—to produce the new low-carbon energy solutions of the future. China’s green policies have paid off: The nation is now sixth worldwide in clean energy product sales as a percent of its gross domestic product, while the United States trails far behind at nineteenth.

China’s robust energy manufacturing sector is partly driven by policies that encourage investments in its manufacturing sector, a strategy we at CAP have long advocated the United States should adopt. The SEAM Act moves our nation in this direction. It extends by two years government funding for investments in manufacturing, increases the amount of funding available, and alters the terms of the funding in order to make it a more effective subsidy for manufacturing. Specifically, it adopts four key policies: 

  • Extends the Advanced Energy Manufacturing Tax Credit for two years
  • Increases the amount of credits available by $5 billion
  • Changes the Manufacturing Tax Credit to place more emphasis on manufacturing than assembly of goods
  • Offers a cash grant in lieu of the Manufacturing Tax Credit (as is currently done with the Investment Tax Credit)

Since its introduction in the American Recovery and Reinvestment Act of 2009, the Manufacturing Tax Credit has proven to be an effective tool to reinvigorate our manufacturing base, but demand for funding still exists. A greater than expected number of companies applied for the program, resulting in an oversubscription of this program by a ratio of 3 to 1. Increasing the amount of funding, and the time that such funding is available, will provide incentives for more companies to make the transition to clean energy production. This will help America build up a green manufacturing sector that can both create jobs at home and increase America’s competitive edge in the green energy economy.

The SEAM Act goes a step beyond just providing more funding. It amends the existing terms of the funding to increase its effectiveness. The new Manufacturing Tax Credit would prioritize funding for companies that provide supplies over those that assemble goods. Drawing this distinction helps target support for companies that need it most. According to 2007 U.S. Census data, the majority of small- to mid-size manufacturing companies across the United States are suppliers rather than assemblers.

There’s another benefit to supporting supply companies over assembly companies. Both types of companies promote economic development, but workers in the supply chain, such as tool and die workers, welders, and machinists, are generally paid more than workers in the assembly chain. A notable exception is in the auto manufacturing sector, where collective bargaining contracts can result in higher-paid assembly jobs.

In addition to being an effective tool for economic recovery, the SEAM Act provides an example of a well-designed tax expenditure. This is critical. As the U.S. Energy Information Administration has shown, more than 60 percent of federal support for the energy industry is now delivered via "tax expenditures"—government spending programs that deliver subsidies through the tax code via special tax credits, deductions, exclusions, exemptions, and preferential rates—and a recent hearing in Congress indicates that this trend is likely to continue. Problem is, many of these tax expenditures are questionable at best.

As discussed in our recent report "America’s Hidden Power Bill," energy tax expenditures should be held to the same standards as all other government spending programs. This means that tax expenditures should have a clearly stated purpose, be measured regularly, operate transparently, work within the larger goals of the federal budget, and be demonstrably effective. Most energy tax expenditures don’t meet these standards, but some do. The "percentage depletion allowance," which provides oil companies a subsidy for pumping oil out of wells, is clearly unnecessary, but the Production Tax Credit, which is given to renewable energy producers, effectively increases electricity produced from renewable energy sources.

The Manufacturing Tax Credit falls into this doing-what-works category. What’s immediately impressive about the MTC is its clear purpose. The Department of Energy states that "the purpose of [the MTC] is to encourage taxpayers to re-equip, expand or establish manufacturing facilities for the production of certain energy related property." This unequivocal statement is important to keeping Congress accountable for the funding it approves. Oftentimes, tax credits are passed without clear identification of the policy the credit is supporting, which allows discrete targeted groups to benefit from government funding that may not actually generate a public benefit.

To ensure that spending delivered through the MTC supports its stated purpose, the statute specifically states that only projects that are expected to be commercially viable should receive money. The statutorily specified review criteria also includes factors that prioritize funding for projects that promote broad economic benefits. These factors include the number of domestic jobs created, the fastest project completion time, and the greatest net impact in avoiding or reducing greenhouse gases. The information companies provide on the application is reflective of these criteria.

Generally, recipients of tax subsidies are not publicly identified, which makes measurement and assessment of the subsidy’s effectiveness nearly impossible. Concealing information about subsidies to companies that are delivered through the tax system doesn’t make sense since the government makes public, on websites such as Recovery.gov and USASpending.gov, the identity of companies that receive other forms of government spending. The Manufacturing Tax Credit is different—the government provides a list of every company that receives it, the value received, and a description of what the company intends to do with that money. This type of information is critical for measuring whether the MTC is delivering results.

What’s more, the MTC is administered effectively. The program awards money through a competitive process, promotes accountability, and is capped at the amount that can be awarded. To be sure, the one-year-old MTC hasn’t been in existence long enough to generate enough data for assessing its effectiveness, but if data in the future indicates that the MTC is no longer working, at that point funding for it should be eliminated. And the statute requires an assessment of the MTC in 2014, which is when projects are required to be completed.

Information is also important for refining and adjusting the MTC so that it delivers maximum bang for the buck. The SEAM Act does this in two ways. First, as discussed above, it prioritizes funding for suppliers over assemblers. And second, it allows companies to receive a cash grant from the U.S. Treasury instead of a tax credit. The change allows a greater variety of businesses to take advantage of the program since currently only businesses with tax liabilities are eligible for this tax expenditure. The cash grant option allows new companies that have yet to make money (and that don’t owe any taxes) to also take advantage of the program.

Despite these important benefits, the MTC is not perfect. Congress, not the Department of Energy, should be responsible for clearly stating the MTC’s purpose in legislative language. But some of the more serious problems with the MTC are ones that plague tax expenditures generally, as explained in our report "Audit the Tax Code." Tax expenditures are delivered through the tax code, which isolates it from the scrutiny and oversight that direct spending receives in the appropriations process. This is a serious problem, but it’s not one that should get in the way of the SEAM Act. Given that the federal government has decided to spend through the tax code, we support this effort to increase the effectiveness of the Manufacturing Tax Credit. And importantly, we support smart policies such as the SEAM Act that strategically and efficiently advance priority government policies.

See also: Visiting China, Seeing Green: Updates from the Trip

Richard W. Caperton is a Policy Analyst with the Energy Opportunity team at the Center for American Progress. Sima J. Gandhi is a Senior Policy Analyst with the Economic Policy team at the Center. And Kate Gordon is Vice President for Energy Policy at CAP.

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