Despite their heavy fiscal burden, green energy advocates and their allies continue to promote tax credits as the solution to meeting new energy demand. These arguments have played out in debates over repealing the Inflation Reduction Act (IRA), as Congressional Republicans are considering a phase-out of the credits as a compromise between those who want full repeal and those who want to keep them.
But phase-outs are never temporary, and Congress has continued to extend production and investment tax credits for solar and wind for decades after they were first instituted, adding to the debt as more producers take advantage of them while simultaneously decreasing the grid’s reliability.
The inevitability of their extension means that a phase-out of the IRA’s tax credits isn’t a compromise that should satisfy fiscal hawks. Republicans should pursue an alternative that encourages investments in reliable energy while reducing the deficit.
Full tax expensing of capital investments and research and development expenditures should be this alternative. By allowing producers to deduct investment costs upfront — rather than spreading the tax benefit over several years — they receive the relief they deserve when they deserve it. Full expensing also avoids the problem of politicians providing subsidies to particular technologies or industries, allowing market actors to determine the best place to innovate. Tax expensing already exists for normal business expenses such as salaries and bills, but the current lack of expensing on capital upgrades and research and design creates a perverse incentive towards pursuing fewer capital investments. Since the value of the dollar decreases over time, allowing producers to deduct these investments from their tax bill immediately through full expensing eliminates the problem of depreciation, thereby encouraging investment in energy technology today.
A new report by the Conservative Coalition for Climate Solutions and the Abundance Institute highlights the benefits of full expensing as a policy that can support tech-neutral investment in energy production while avoiding the fiscal pitfalls associated with tax credits. As the authors explain, “Instead of attempting to prophesize what emerging energy sources will likely succeed via government support, full expensing incentivizes entrepreneurs to investigate opportunities and provides a pro-growth environment to scale up.”
Because the IRA’s subsidies target specific technologies such as solar and wind plants, businesses are incentivized to make capital investments driven by politics rather than sound economics. The report discusses how solar and wind plants cause negative electricity prices as subsidies drive the construction of these plants that generate electricity absent market demand. This phenomenon introduces new layers of complexity to the grid, imposing costs on ratepayers and other generating plants. With full expensing, producers could better respond to price signals by building energy capacity, whether it be natural gas, coal, or nuclear, that operates when consumers demand power. Meeting consumer demand more efficiently lowers energy costs for consumers by reducing the burden of overbuilding wind and solar capacity and transmission lines.
Furthermore, full expensing also poses a smaller cost on the federal budget than the IRA’s tax credits. The report cites a Tax Foundation study that finds that permanently implementing full expensing for short-lived assets, structures, and research and development costs would reduce federal revenues by about $1.14 trillion over ten years.
While that sounds like a lot of lost revenue, eliminating the IRA’s tax credits — which the Cato Institute estimates to be $1.97 trillion over ten years — would more than cover this.
These savings also come with added environmental benefits through improved energy efficiency and innovation. The report points out that full expensing encourages producers to invest in technologies that lower energy costs by utilizing resources more efficiently and reducing carbon emissions from energy production. Compared to the IRA, which reduced carbon emissions at an estimated cost of between $224 and $535 a ton, full expensing provides a much cheaper and effective alternative.
Finally, the authors discuss the political argument behind eliminating the IRA’s tax credits and implementing full expensing. If capital investments are fully expensed for all energy producers, that helps politicians avoid battles over which technologies to fund in budget debates. According to the report, “A swap for expensive IRA credits in favor of full expensing, politically, allows members of both parties to tell those collecting IRA subsidies today that they remain supportive of clean energy developments, even while they remove programs that have become too expensive.” This switch allows Republicans whose districts were targeted with subsidies from the IRA to benefit from full expensing while also eliminating the IRA’s market-distorting subsidies that reduce economic growth and grid reliability.
Debates over the IRA’s tax credits involve many conflicting priorities, but eliminating the IRA tax credits and supporting full expensing should rally all members of Congress because the combination produces a net reduction in the federal budget while still encouraging investment in energy production.
