Solar and Wind Have Outgrown Their Tax Credit Allowance
Faced with little work and unaffordable rent, countless millennials bit the bullet and moved back home with their parents during the pandemic. Temporary solutions—however awkward—are sometimes necessary. The Democrats’ reconciliation bill, however, is set to make America’s longest ‘temporary solution’ more permanent and more expensive.
Wind and solar energy producers have enjoyed temporary federal tax credits for three and four decades, respectively. Congress is set to swap their allowance for a trust fund. To spur innovation among genuinely start-up renewable industries, it’s time to give wind and solar some tough love and evict them from the public purse.
The federal government provides a variety of tax credits for renewable power generators through two programs: the investment tax credit (ITC) and the production tax credit (PTC). The ITC provides credits up to 30% for investment in a variety of energy generation projects. While niche technology such as hydrogen fuel cells and waste energy recovery property benefit from the program, the most lucrative benefits are ironically reserved for the most established renewable technologies, namely wind and solar.
Most of the credits are currently set to phase out at the end of 2023, but offshore wind will enjoy the highest credit (30%) until 2025. That generous discount is only topped by the benefit given to commercial and utility solar or geothermal projects, which enjoy a permanent 10% tax credit.
The second program is the renewable electricity production tax credit (PTC), which gives various renewable generators a per kilowatt hour (kW/h) credit for their first ten years of operation. First enacted in 1992, the PTC was initially slated as a temporary program that would run until 1999. It has since been extended at least 12 times, at a cost of $5.1 billion. While geo-thermal and closed loop biomass enjoy the largest credit at 2.5 cents/kWh, wind power once again enjoys a higher rate of 1.5 cents/kWh than its competitors, which get 1.3 cents/kWh.
The Democrats’ Build Back Better reconciliation package seeks to expand these two programs, raise their value, and convert them into optional direct payments. This last change would constitute a subtle but significant shift in how federal taxpayers bankroll renewable energy producers. After decades of generously reducing their IRS bill, taxpayers would then be forced to cut them a check.
But the most basic problem with these tax ‘credits’ is that they no longer resemble support for start-up industries. Rather, they’re becoming a public trust fund for the renewable industry’s middle-aged child. Federal tax credits for non-fossil fuel energy projects are nothing new, the first of which were implemented through the Energy Tax Act of 1978. For reference, Microsoft was founded in 1975 and Apple in 1976. The federal government’s renewable tax scheme is now older than the majority of Americans. Any ‘temporary’ solution that runs for more than four decades deserves a serious conversation around the dinner table.
Given the financial benefits that the IRS has bestowed upon the wind and solar industries, it’s no surprise to see them doing well. Rather than start-ups in suburban garages, companies generating power from wind and solar are listed on the S&P 100 and represented on the Fortune 500 list. Moreover, an increasing number of America’s largest companies are pledging to buy more energy from wind or solar sources. To be clear—successful American businesses that create jobs, compete for consumer dollars, and diversify America’s energy sources deserve to be commended. But generous tax credits shouldn’t be a permanent entitlement for thriving businesses.
Recent history shows that the federal government has a less than stellar record of picking clean energy winners. But if the Biden-Harris team and their congressional allies can’t drag themselves away from the renewable roulette table, they should at least make an informed bet on industries that could use the help. A cursory glance at the federal government’s own renewable generation statistics would go a long way.
In 2019, utility-scale wind had a domestic capacity of 103,571 megawatts (MW), while solar’s total capacity sat at 60,681 MW. By contrast, fuel cells have a paltry 250 MW capacity and the American industry is far from leading the pack. Earlier this year, a hydrogen fuel cell plant opened in South Korea with a capacity three times higher than America’s largest facility.
The domestic wind and solar power industries have come a long way in recent years, and American consumers benefit when their energy comes from diverse sources. After decades upon decades of federal tax benefits, it’s time for these legacy renewable industries to leave the nest and make way for a new generation.
Oliver McPherson-Smith writes for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal