We often see criticism of politicians for sensing “which way the wind blows,” that is, shifting their policies to pander to the prevailing interests of important special interest groups. The associated negative connotation is that politicians do this without regard to whether these policies are wise and beneficial for everyone.
So when a Member of Congress takes a position that is literally going against the wind in the home district and state, we ought to take notice. Someone has some strong convictions.
This is the case with U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties.)
The issue is the production tax credit (PTC) paid to wind power companies. For each kilowatt-hour of electricity produced, the United States government pays 2.2 cents. Wind power advocates contend the PTC is necessary for wind to compete with other forms of electricity generation. Without the PTC, it is said that no new wind farms would be built.
The PTC is an important issue in Kansas not only because of the many wind farms located there, but also because of wind power equipment manufacturers that have located in Kansas. An example is Siemens. That company, lured by millions in local incentives, built a plant in Hutchinson. Employment was around 400. But now the PTC is set to expire on December 31, and it’s uncertain whether Congress will extend the program. As a result, Siemens has laid off employees. Soon only 152 will be at work in Hutchinson, and similar reductions in employment have happened at other Siemens wind power equipment plants.
Rep. Pompeo is opposed to all tax credits for energy production, and has authored legislation to eliminate them. As the wind PTC is the largest energy tax credit program, Pompeo and others have written extensively of the market distortions and resultant economic harm caused by the PTC. A recent example is Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away, which appeared in the Wall Street Journal.
The special interests that benefit from the PTC are striking back. An example comes from Dave Kerr, who as former president of the Hutchinson/Reno County Chamber of Commerce played a role in luring Siemens to Hutchinson. Kerr’s recent op-ed in the Hutchinson News is notable not only for its several attempts to deflect attention away from the true nature of the PTC, but for its personal attacks on Pompeo.
There’s no doubt that the Hutchinson economy was dealt a setback with the announcement of layoffs at the Siemens plant that manufactures wind power equipment. Considered in a vacuum, these jobs were good for Hutchinson. But we shouldn’t make our nation’s policy in a vacuum, that is, bowing to the needs of special interest groups — sensing “which way the wind blows.” When considering everything and everyone, the PTC paid to producers of power generated from wind is a bad policy. We ought to respect Pompeo for taking a principled stand on this issue, instead of pandering to the folks back home.
Kerr is right about one claim made in his op-ed: The PTC for wind power is not quite like the Solyndra debacle. Solyndra received a loan from the Federal Financing Bank, part of the Treasury Department. Had Solyndra been successful as a company, it would likely have paid back the government loan. This is not to say that these loans are a good thing, but there was the possibility that the money would have been repaid.
But with the PTC, taxpayers spend with nothing to show in return except for expensive electricity. And spend taxpayers do.
Kerr, in an attempt to distinguish the PTC from wasteful government spending programs, writes the PTC is “actually an income tax credit.” The use of the adverb “actually” is supposed to alert readers that they’re about to be told the truth. But truth is not forthcoming from Kerr — there’s no difference. Tax credits are government spending. They have the same economic effect as “regular” government spending. To the company that receives them, they can be used — just like cash — to pay their tax bill. Or, the company can sell them to others for cash, although usually at a discounted value.
From government’s perspective, tax credits reduce revenue by the amount of credits issued. Instead of receiving tax payments in cash, government receives payments in the form of tax credits — which are slips of paper it created at no cost and which have no value to government. Created, by the way, outside the usual appropriations process. That’s the beauty of tax credits for big-government spenders: Once the program is created, money is spent without the burden of passing legislation.
If we needed any more evidence that PTC payments are just like cash grants: As part of Obama’s ARRA stimulus bill, for tax years 2009 and 2010, there was in effect a temporary option to take the federal PTC as a cash grant. The paper PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States explains.
Astonishingly, the wind PTC is so valuable that wind power companies actually pay customers to take their electricity. It’s called “negative pricing,” as explained in Negative Electricity Prices and the Production Tax Credit:
As a matter of both economics and public policy, no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet, the federal Production Tax Credit (“PTC”) for wind generation is doing just that with increasing frequency in electricity markets across the United States. In some “wind-rich” regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the “negative price” payment, because they receive a $22/MWH federal production tax credit for every MWH generated.
In western Texas since 2008, wind power generators paid the electrical grid to take their electricity ten percent of the hours of each day.
Once we recognize that tax credits are the same as government spending, we can see the error in Kerr’s argument that if the PTC is ended, it is the same as “a tax increase on utilities, which, because they are regulated, will pass on to consumers.” Well, government passes along the cost of the PTC to taxpayers, illustrating that there really is no free lunch.
Kerr attacks Pompeo for failing to “crusade” against two subsidies that some oil companies receive: Intangible Drilling Costs and the Percentage Depletion Allowance. These programs are deductions, not credits. They do provide an economic benefit to the oil companies that can use them (“big oil” can’t use percentage depletion at all), but not to the extent that tax credits do.
Regarding these deductions, last year Pompeo introduced H. Res 267, titled “Expressing the sense of the House of Representatives that the United States should end all subsidies aimed at specific energy technologies or fuels.”
In the resolution, Pompeo recognized the difference between deductions and credits, the latter, as we’ve seen, being direct subsidies: “Whereas deductions and cost-recovery mechanisms available to all energy sectors are different than credits, loans and grants, and are therefore not taxpayer subsidies; [and] Whereas a deduction of costs and cost recovery with respect to timing is not a subsidy.”
Part of what the resolution calls for is to “begin tax simplification and reform by eliminating energy tax credits and deductions and reducing income tax rates.”
Kerr wants to deflect attention away from the cost and harm of the PTC. Haranguing Pompeo for failing to attack percentage depletion and IDC with the same fervor as tax credits is only an attempt to muddy the waters so we can’t see what’s happening right in front of us. It’s not, as Kerr alleges, “playing Clintonesque games of semantics with us.” As we’ve seen, Pompeo has called for the end of these two tax deductions.
If we want to criticize anyone for inconsistency, try this: Kerr criticizes Pompeo for ignoring the oil and gas deductions, “which creates a glut in natural gas that drives down the price to the lowest levels in a decade.” These low energy prices should be a blessing to our economy. Kerr, however, demands taxpayers pay to subsidize expensive wind power so that it can compete with inexpensive gas. In the end, the benefit of inexpensive gas is canceled. Who benefits from that, except for the wind power industry? The oil and gas targeted deductions also create market distortions, and therefore should be eliminated. But at least they work to reduce prices, not increase them.
By the way, Pompeo has been busy with legislation targeted at ending other harmful subsidies: H.R. 3090: EDA Elimination Act of 2011, H.R. 3994: Grant Return for Deficit Reduction Act, H.R. 3308: Energy Freedom and Economic Prosperity Act, and the above-mentioned resolution.
I did notice, however, that Pompeo hasn’t called for the end to the mohair subsidy. Will Kerr attack him for this oversight?
Finally, Kerr invokes the usual argument of government spenders: Cut the budget somewhere else. That’s what everyone says.
Creating entire industries that exist only by being propped up by government subsidy means that we all pay more to support special interest groups. A prosperous future is best built by relying on free enterprise and free markets in energy, not on programs motivated by the wants of politicians and special interests. Kerr’s attacks on Pompeo illustrate how difficult it is to replace cronyism with economic freedom.
Mr. Kerr, as President of the Kansas Senate, voted consistently against incentives to lower airfares at all airports across Kansas including his own airport in Hutchinson. He supports only those who put money in his pockets. Mr. Kerr is looking at running for Congress against Mr. Pompeo.
I want to expose one crack in your line of thinking. I get what you are saying about a tax credit being the same as government spending. However, that’s only if you assume that those taxes would have been paid in full were it not for the PTC. This tax credit, just like tax abatements and similar incentives for new industry are offered on the premise — true in at least some, if not many, instances — that were it not for those incentives, the industries would not build and devleop. The idea being that, yes, government is giving a tax break but doing so on taxes that wouldn’t have been paid otherwise. It’s how we stimulate new industry and create jobs.
“Rep. Pompeo is opposed to all tax credits for energy production, and has authored legislation to eliminate them.”
No. He has not. He has authored a bill (H.R. 3308) that leaves intact $72 billion in breaks for oil and gas. According to a report from the American Petroleum Institute, the two oil and gas subsidies it “cuts” have already been zeroed out of the budget.
I have Lyon-Coffey Electric Coop provide me with Electricity. They are currently before the Kansas Rate Commission requesting an Increase in Rates. They create profit by obtaining a “Customer Fee” PLUS breaking the Rate by which a unit of electricity is purchased into 6 categories. The Individual Household pays the highest rate for electricity and the customer fee is scheduled to increase by 50%. You say there is NO Subsidy for Established Electric Companies, you are Wrong it just does not take the form of tax credit. Higher Rates and Fees on Individual Homeowners is the Backdoor approach to obtain monies with the Blessing of our Government, pure profit. There is NO Free Market here ,, No Competition. The Wind Power would at least provide some competition in the Rural parts of Kansas.
The main thrust of Dave Kerr’s comments pertains to Congressman Pompeo’s double standard on energy tax policy. In an attempt to defend the Congressman, Mr. Weeks argues that somehow tax credits are more egregious market interference mechanisms than the laundry list of unique tax provisions provided the oil and gas industry as illustrated by Jeff.
Several on Jeff’s provided list are not specifically unique to the oil and gas industry like the Sec. 199 provisions. However, the list clearly shows the two most important ones for Kansas, the Intangible Drilling Cost and Percentage Depletion tax expenditures that Kerr highlights. The list also aptly points out Pompeo’s not so clever ruse sacrificing the non-active oil and gas tax credits that kick in at some price around $30/bbl.
Its interesting that Weeks has declared that Pompeo is calling for the end of the IDC and PD in reference to his evaluation of Pompeo’s non-binding resolution that includes a lecture on what defines the dreaded subsidy term, at least in the Pompeo world: “As we’ve seen, Pompeo has called for the end of these two tax deductions.” Perhaps Pompeo will confirm Weeks’s assertion, I certainly didn’t read his proposed legislation and resolution that way.
However, Weeks makes it clear he calls for the end of the IDC and PD, possibly following Cato’s lead: http://www.cato.org/publications/commentary/eliminating-oil-subsidies-two-cheers-president-obama
Weeks’s argument that the PTC raises consumer costs while the IDC and PD drop their costs is unfounded. The negative pricing that he and Pompeo are concerned about, referring to the Pompeo WSJ piece, do likely occur periodically. However, spot market prices for electricity are extremely volatile and on balance these temporary market extremes are offset by times when wind energy helps drive down prices during demand conditions.
One needs to look no farther than recent purchases and commitments by Alabama Power, who without any renewable portfolio standard obligations, is buying wind energy from Kansas and Oklahoma: http://www.businessweek.com/ap/2012-10-01/alabama-power-among-leaders-in-se-in-wind-power
From the Businessweek article above: “The PSC (Public Service Commission-the Alabama’s equivalent to the Kansas Corporation Commission) has no requirements for electric utilities to pursue wind-generated power. In approving one of the agreements last month, the PSC said the wind-generated power must not cost more than the electricity that Alabama Power generates itself. John Kelley Alabama Power’s resource planning director, said the contracts should provide net savings to Alabama Power customers.”
Any argument that the PTC is not lowering the cost to Alabama Power is ludicrous. They are buying the power, again voluntarily, after comparing wind to their other sources of generation leaving no doubt that negative pricing is either non-existent or inconsequential. Besides, look that money flowing into the communities both to the landowners and local units of government plus the related jobs.
The oil and gas IDC and PD, which is estimated to cost about $9 billion for the years 2009-2013 in the Joint Committee on Taxation report cited in the Pompeo WSJ article, are important to Kansas: https://www.jct.gov/publications.html?func=startdown&id=3642 In the same vein, the above cited $6 billion wind PTC is also important to Kansas. Both are tax based incentives to develop domestic energy–good are bad, there is absolutely no difference in principle, only in the process.
Its unfortunate that from all the largesse coming out of Washington, Mr. Pompeo and his followers have decided to target an industry important to his home state in such subversive manner. What could be his motivating force? There has been no such rhetoric I am aware of coming from the pro oil and gas organizations like the Kansas Independent Oil and Gas Association (KIOGA). Pompeo’s grandstanding draws unwanted attention to the IDC and PD. KIOGA has had to work diligently to protect these tax expenditures that are critical to the independent producers in Kansas–and Pompeo is only making their job harder.
Mark, are you really claiming that in principle there is no difference between tax credits and tax deductions? Do you think that wind power companies would trade the PTC for a 2.2 cents per kilowatt-hour tax deduction?
Thanks for the dialog Bob. If you go to the JCT document Pompeo cited above, on page 29 you will find the listing for the PTC as $5.9B. On page 33, the IDC and PD, if totaled, are $9.1 for the same 5 yrs. These are tax expenditures costing the US Treasury the dollars listed regardless of the process involved.
If the the tax expenditure dollars involved in the 2.2 cents per kWhr PTC could be transformed into a permanent tax expenditure by Congress similar to the IDC and PD that have been around for almost 100 years, I am sure the wind farm developers would be pleased.