Since Obama released the first draft of his economic stimulus plan last week many progressive-leaning figures among pundits, congress people and economists have pointed out that much bigger investments need to be made in infrastructure and the proposed tax cuts must be smaller or done away with.
On the face of it, I agree with this assessment, as do most DK'ers.
However there is a third way, well proven, that satisfies the demand for dramatically increased green infrastructure investments while satisfying the desire to provide a tax advantage to businesses and individuals.
The policy vehicle already exists, it has existed for many years and it has been tremendously important to the renewable energy industry. It simply has not yet been utilized to its fullest potential.
Jump the fold and I'll explain what it is and how to open it up to everyone...
The policy vehicle I am referring to is the Federal Investment Tax Credit (ITC).
The ITC for renewable energy is the leading Federal incentive for solar installations and small wind.
The ITC offers a 30% tax credit to qualifying businesses and individuals for specified Renewable Energy investments.
For example, a business installs a $100,000 solar system. The business receives a 30% Tax Credit for the solar system which equal $30,000 on the $100,000 system. In effect, the business is getting a $100,000 solar system for just $70,000.
Obviously the tax credit is good for the business, good for the environment, good for the renewable energy industry and good for all of the people employed in the process.
What is surprisingly about Tax Credits and incredibly important is that although they lower government tax revenue in the short term, over the long term RE/EEI Tax Credits actually lead to greater tax revenue due to increased economic activity, both direct and indirect.
In fact, GE Energy Financial Services conclusively demonstrated that the Production Tax Credit for wind, actually leads to greater tax revenue for the government.
I believe the same holds true for solar power and I am currently investigating this. If anyone has information here, please provide it in the comments.
Keep in mind that the GE study did not even factor in externalities such as mercury poisoning, waste disposal (whether nuclear or coal ash) or CO2 taxes. When externalities are factored in, the case for Tax Credits for Renewable Energy and Energy Efficiency Improvements (RE/EEI) becomes overwhelmingly strong.
At this point - if the above information is new information to you, you may be wondering why these Tax Credits haven't been move effective at enabling businesses and individuals to install much greater levels of renewable energy production.
Here are the key constraints of the Investment Tax Credit policy as it exists today followed by simple solutions:
Constraint # 1 - Business Must Be "Profitable"
A business must be profitable to have tax liability to make a tax credit useful. In other words, if the business is just breaking even, then there is no corporate tax liability and thus no use for a tax credit. Many businesses are set up to pass profit to owners who are then responsible for income tax. In such cases the business will never be "profitable".And of course, given the state of the economy, far fewer corporations will be profitable for some time, thus greatly harming the effectiveness of the ITC as currently designed.
Solution # 1a - Address More than just Corporate Tax
Recognize that even an unprofitable business, let alone one that breaks even, is paying significant money in taxes such as Payroll Taxes.Thus rather than giving a Tax CUT on Payroll Taxes (as proposed by Obama last week) the business should get a Tax CREDIT for an investment in RE/EEI. This would give strong incentive for the business to make an investment that would be beneficial to the business, to the environment and to the economy.
Solution # 1b - Initially Lower the Matching Investment Required of the Business
Even with a Tax Credit against Payroll Taxes or Employee Income Tax Withholdings, a business may not be able to afford to cover $70,000 of a $100,000 system. To overcome this significant obstacle, at least in the first, most critical year of this improved program, let us reduce the amount the employer has to invest.For example allow the Tax Credit to cover up to 50% of the investment. In this case the employer could install a $60,000 system, paying for half of it with a tax credit. The financing for the $30,000 paid for by the employer would likely cost less than the energy savings gained by the business, making such an investment a no-brainer.
While average system sizes would be smaller, there would be far more of them as businesses would find it a competitive advantage to lower their energy costs and to lower their exposure to energy inflation.
Constraint # 2 - Energy Efficiency is Ignored
The ITC is not available to Energy Efficiency Improvements. Energy Efficiency is the lowest cost way to reduce our reliance on fossil fuels and thus to reduce our carbon footprint.Solution # 2 - Offer Tax Credits for EEI Too
Very simply, EEI projects must also be eligible for the ITC. In fact, low cost, highly effective EEI steps should be required to occur before Renewable Energy projects, in many situations.
Constraint # 3 - Tax Credits Are Not Transferable
Tax Credits are not transferable. If they were, you and I, either as individuals or as business owners, or both, could much more easily pool our tax credits to create a shared projects more profitably and with greater economies of scale.
Solution # 3 - Make Tax Credits Transferable
Transferability enables much greater flexibility as to who actually can use that tax credit. Outside investors, including individuals, not just businesses, would be able to invest in solar energy projects, use the tax credit, and provide the financing to make an unprecedented number of projects move forward.
With the changes outlined here, we can achieve a massive investment in clean, green energy that benefits almost everyone and would be the simplest, fairest ITC yet.
By Earth Ling's diary of Daily Kos.
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