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A Golden Opportunity to Evaluate Energy Tax Expenditures

SOURCE: AP/Harry Hamburg

Rep. Sander Levin (D-MI) has introduced a "green energy jobs" bill that offers lawmakers a chance to start putting evaluation measures in place for tax expenditures.

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Rep. Sander Levin (D-MI), chairman of the House Ways and Means Committee, said July 19 that he would soon release draft language for a “green energy jobs” bill. This proposed legislation would extend over $20 billion worth of tax expenditures—special credits, deductions, and preferential tax rates—directed toward the renewable energy sector. Despite their large price tag little is known about the effectiveness of these subsidies.

Levin’s bill provides Congress with an opportunity to establish the important practice of codifying mandatory performance evaluations into any authorization of a major tax expenditure. As we wrote in “America’s Hidden Power Bill,” “Most tax expenditure programs do not have a system for performance measurement in place…The lack of performance data can make it challenging to determine how effective a tax expenditure is at accomplishing its purpose.”

Decisions about whether to fund subsidies—including renewable energy tax expenditures whose goals we support—should be made on the basis of what works. Tax expenditures with proven impact should continue, while those that are underperforming should be reformed or eliminated.

So what should the mandatory evaluation of a tax expenditure include? First, any tax subsidy should be subject to fundamental questions such as: Who benefits from the subsidy? Does the tax expenditure achieve its stated purpose? Could the purpose be achieved more effectively or efficiently through a direct spending alternative?

Energy-focused tax expenditures should also be judged according to additional criteria. In general, government policies should encourage investment geared toward making our energy supply clean, safe, reliable, and affordable. Specifically, lawmakers should know the extent to which energy tax subsidies:

  • Change greenhouse gas emissions
  • Affect local air and water quality
  • Diversify our energy supply, both geographically and technologically
  • Contribute to the reliability and safety of our energy supply

This type of concrete information is critical to producing informed decisions about where government should spent its money. The Congressional Budget Office, for example, recently released a report on biofuel tax credits suggesting that the credits as currently structured will have questionable impact on future biofuel production. That information can be used to properly reform the tax credit and make it effective or eliminate the credit if there is a cheaper alternative.

Further, much of the data that could be used for evaluating the tax expenditures in Levin’s green jobs bill is already collected by the Energy Information Administration and the Environmental Protection Agency. One initial draft of the bill reviewed by CAP suggests that all but three of the tax expenditures in the green jobs bill have been in place for at least a year. That means data already exists about how well they work. That data should be analyzed before extending these subsidies.

Unfortunately, there is no established practice of compiling and assessing this data because tax expenditures are not integrated into the congressional budget process. So when lawmakers vote on whether to pass the green jobs bill—and provide over $20 billion in subsidies—they will do so without critical information.

Congress can take an important first step in preventing this problem by writing into the green jobs legislation a requirement that the tax expenditures authorized be measured and evaluated for effectiveness. Lawmakers should ultimately integrate the more than $1 trillion of annual tax expenditures into the budget process so that evaluation is regular and systematic.

Until then, piecemeal evaluation efforts are critical. The green jobs bill presents lawmakers with an important opportunity to begin a more results-focused public policy that prevents waste and directs taxpayer dollars only to effective programs.

Richard W. Caperton is a Policy Analyst with the Energy Opportunity team and Sima J. Gandhi is a Senior Policy Analyst with the economic policy team at American Progress.

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