In a news conference last week, U.S. Representative Mike Pompeo of Wichita and two others criticized President Barack Obama for misunderstanding of the meaning of a taxpayer protection pledge that Pompeo has signed.
The pledge is the famous pledge advanced by Grover Norquist of Americans for Tax Reform, where signers pledge not to increase taxes. The “tax increase” the president refers to are various tax credits that benefit some forms of energy production, particularly wind and solar power. Norquist, along with Senator Jim DeMint of South Carolina, participated in the conference.
Pompeo said the president “called out” those who signed the ATR pledge, specifically arguing that allowing the wind production tax credit (PTC) to expire would be a violation of the pledge. The ATR taxpayer protection pledge is to “One, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and two, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”
Pompeo has introduced legislation in the House of Representatives that would end tax credits on all forms of energy production. By itself, that might be a violation of the pledge. The bill, however, specifies that the savings from the elimination of the spending on tax credits would be used to lower the corporate income tax rate. The use of the savings to reduce tax rates is in agreement with the second plank of the ATR pledge.
Pompeo’s bill is H.R. 3308: Energy Freedom and Economic Prosperity Act. This bill is currently in committee. Sen. DeMint introduced an amendment to a Senate bill that would have accomplished the same, but the amendment received only 26 votes. Pompeo characterized this as an advance, as just a few years ago, he said such a bill or amendment would have received only a few votes. But this received the votes of a majority of Republican members of the Senate, including that of minority leader Mitch McConnell.
In his remarks, DeMint said that while the president talks about eliminating corporate loopholes, he is hypocritical in his criticism of this legislation. If Congress could eliminate the tax credits — loopholes — for big oil and all energy and lower tax rates for all, it would be “a model for what we could do across our whole tax code.”
Norquist emphasized the temporary nature of many loopholes or tax advantaged treatment added to the tax code. These are usually pitched as temporary measures, needed because the policy goal is good, the industry is in its infancy, and it needs temporary help. But as in the case of the wind PTC, these special advantages are often extended or made permanent.
The issue of special tax treatment for the oil and gas industry arose. Norquist said that these tax considerations almost always fall into the categories of depreciation and expensing, which are available to all industries. He said if these are available to General Electric and Wal-Mart, they should also be available to all industries, including oil and gas.
Not everyone, including all conservatives, agree that tax credits are a form of spending implemented through the tax code. Recently Kansas Governor Sam Brownback and U.S. Senator Jerry Moran of Kansas made the case for extending the production tax credit for the production of electrical power by wind. See Wind tax credits are government spending in disguise.
In their op-ed, the Kansans argued the PTC is necessary to let the wind power industry “complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace.” As the PTC has been in effect is 1992, a period of 20 years, Norquist’s warning about the temporary nature of these programs is relevant.
The proper way to view the PTC is as a government spending program, recognizing the true economic effect of tax credits. Only recently are Americans coming to realize this, and as a result, the term “tax expenditures” is coming into use to accurately characterize the mechanism of tax credits. Canceling this spending is what would let tax rates be reduced, according to Pompeo’s proposed legislation.
Amazingly, Brownback and Moran do not realize this, at least if we take them at their written word when they write: “But the wind PTC is a winning solution because it allows companies to keep more of their own dollars in exchange for the production of energy. These are not cash handouts; they are reductions in taxes that help cover the cost of doing business.” (Emphasis added.)