It's Time for Congress to Phase Out Solar and Wind Tax Credits
In recent years, Congress has made strong progress toward making the tax code fairer, simpler and more pro-growth.
As the end-of-year-budget deadline approaches, lawmakers should not undermine these goals by extending distortionary tax provisions like solar and wind credits.
Back in 2015, Congress enacted bipartisan tax legislation with the goal of ending the pattern of annual “tax extenders” legislation. The proposal took the largest extenders and made them permanent or put them on the pathway toward repeal.
For instance, the law made the research & experimentation (R&E) tax credit and Section 179 small business expensing permanent, two provisions that have enjoyed strong support from both parties. The legislation also put several credits on the pathway to phase out including the Investment Tax Credit (ITC) and Production Tax Credit (PTC) used by wind and solar energy.
Under the agreement, the Solar ITC begins phasing down from 30 percent at the end of the year to 10 percent starting 2022, while wind credits already began phasing down in 2017.
In spite of this agreement, Democrats are now pushing to extend these provisions and included them in a recently released “Green New Deal” tax proposal. This proposal, a grab bag of leftist priorities, will make the credits effectively permanent as lawmakers will undoubtedly call for extension after extension whenever these credits again begin to reach their expiration date.
There are many reasons Congress should not extend these provisions.
For one, solar and wind credits distort the tax code by creating incentives to make decisions based on the tax benefit, rather than the merits of the technology. Ideally, the code should be neutral so that the most economically productive decisions are made.
In addition, the original goal of these credits – to encourage emerging technologies – has been achieved.
Solar has experienced strong growth this decade in part because of the credit. It is projected to be morecompetitive than natural gas by early next decade and grew by 30 percent last year. All told, renewables are already almost 20 percent of total U.S. electricity generation.
Even supporters of solar and wind technologies agree the technologies are mature enough to stand on their own two feet. For instance, Senate Finance Committee Chairman Chuck Grassley (R-Iowa), a longtime champion of the wind credit, has repeatedly said that the 2015 extension and phaseout period should be maintained.
Not only are preferential wind and solar credits unnecessary, but businesses are already seeing tax reduction thanks to the Tax Cuts and Jobs Act (TCJA). Thanks to the tax cuts, individuals at every income level and businesses large and small alike are seeing lower taxes.
The corporate tax rate was lowered from 35 percent (the highest statutory rate in the developed world) to 21 percent and the 20 percent small business deduction was created for pass-through entities.
Tax reform also promoted investment by creating 100 percent full business expensing for five years, while preserving the R&E credit and the ability to deduct interest.
These policies are working – the economy is strong, wages are growing, and job openings are at an all-time high. This broad-based tax reduction also stands in stark contrast to the narrow, temporary, and preferential tax policies that have been pushed in the past.
Ultimately, there is no excuse for Congress to devote any time to extending wind and solar credits. All year, Congress has failed to pass substantive legislation and there is no shortage of bipartisan proposals that deserve attention.
Extending solar and wind credits do not belong on this to-do list. They are no longer needed by industry, undermine the success of the recent tax reform efforts, and would mark a return to Congress’ bad habit of subsidizing special interest over providing broad based tax relief.
