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Tax package – another missed opportunity to get things right

On December 17, 2010, President Obama signed an $858 billion legislative package.

[ President Obama signs legislative package – image credit: White House ]

The package extends a number of provisions on energy:

* Tax credits for making energy-efficient home improvements. The 30% credits in the 2009 economic stimulus bill are cut back to 10%, up to varying amounts, for insulation or energy-efficient windows or roofs. There also are credits of $50 to $150 for purchases of energy-efficient fans, water heaters and furnaces.

* Grants as under the Treasury Grant Program of the 2009 stimulus bill, offering renewable power developers such as wind and solar facilities grants of up to 30% of project costs, in lieu of tax credits they would otherwise receive. Hydropower and certain biomass projects receive half the amount available to the others.

* Transit benefits, allowing the use of up to $230 a month per employee in pre-tax dollars for the expense of commuting by train, bus or van pool.

* Support for “alternative fuel”:

A 45-cent-per-gallon tax credit for ethanol through 2011. Some use of ethanol is also mandatory by law, while domestic production is further supported by tariffs; the package extends the current 54-cent-per-gallon tariff on imported ethanol and the 22.67-cent-per-gallon tariff on ethyl tertiary butyl ether.

A $1-per-gallon tax credit for biodiesel. The package also seeks money for cleaning up more than 14,000 old diesel engines every year in trucks, school buses and other applications.

Also, a 50 cents-per-gallon tax credit for companies using liquefied natural gas, liquefied coal and other alternative fuels, excluding ethanol, methanol and so-called “black liquor” produced from paper manufacturing, reports Platts.

The support for ethanol was opposed by a range of groups, including environmentalists and livestock producers. “The federal government should not waste another $6 billion on this needless subsidy,’’ a coalition that included the American Meat Institute, the National Taxpayers Union, the National Wildlife Federation and the Snack Food Association declared.

Instead of more decisively moving ahead with transport electrification, the package keeps supporting vehicles that are driven on fuel.  Biofuel competes with food and forests for land and water, while taking extra fertilizers and energy, with little or no net benefit to the environment.

Such support for “alternative fuel” comes at a high price for taxpayers and for genuinely clean alternatives, for which it becomes even harder to compete. Support for liquid coal could cost taxpayers $400 million per plant, every year, on top of subsidies that coal already receives.

This focus of this package on tax, rather than on climate, has wasted another opportunity to get things right. Tax cuts and extension of tax credits can only increase budget deficits at the expense of all of us, i.e. those who work hard and are most productive, as well as those who can make little or no financial contribution at all. Tax cuts generally benefit people on high incomes and the larger, most profitable companies. Small business and people on low incomes do not benefit from tax cuts or credits, since they don’t pay much tax to start with.

Because developers of solar and wind energy had little prospect of profits, the initial tax credits had to be converted to grants to get things moving. But it’s even better to impose fees on products that need to be discouraged (e.g. fossil fuel), while using the revenues to each time fund genuinely clean local alternatives (e.g. transport electrification, solar and wind power, etc). Such feebates can be implemented on a budget-neutral basis, would create numerous new local job and investment opportunities, would benefit our health, would minimize government bureaucracy and waste, would optimize consumer choice and would be better in many further respects.

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