A Level Playing Field (with on-ramps)

June 25th, 2012

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By Ryan Fitzpatrick and Joshua Freed

This piece was originally posted on National Journal.

America’s tax code is holding the country back from a more productive and prosperous economic future. Third Way has long advocated for an updated comprehensive tax policy to promote innovation and job creation, help domestic industries compete in the global market, and draw business and investment from international competitors. This vision for general tax policy reform easily applies to energy, as well. To leverage our energy tax policy to the nation’s greatest advantage, we need to look at both the short and long term strategies simultaneously. The short term is pretty easy, so let’s take care of the long-term first. As Mom would say, you finish the brussels sprouts before you get dessert.

The tax system should essentially level the playing field in the energy market. And while the ultimate goal should be tax fairness among energy industries, there should be an “on-ramp” that allows innovative technologies to break into an energy market that requires large sums of capital, has long lead times for development and deployment, and is often dominated by well capitalized incumbents. Providing tax incentives for energy technologies that could help America meet its economic or environmental goals is one way of creating this type of on-ramp. We need, however, to make sure that such benefits do not become a permanent means for companies to do business. Any tax incentive should have a duration that is long enough to provide certainty and attract private investment, but short enough to avoid a scenario in which the government is propping up a technology that may never be able to stand on its own feet. Finding this balance of support from the government and performance from the industry will be a challenge, but will also allow U.S. firms and technologies to remain at the forefront of global energy markets.

Now, on to dessert. Our short term energy tax policy strategy should simply be to start laying the groundwork for a fuel-blind energy policy. A good start would be to open up the master limited partnership (MLP) tax status to all energy producers, in addition to fossil fuel producers who currently enjoy the option of using it. The MLP Parity Act introduced by Sen. Chris Coons (D-DE) and Sen. Jerry Moran (R-KS) would provide fairness to other energy industries, and unlock billions of dollars in private investment in the U.S. Beyond this and other small tweaks, we simply need to maintain current energy tax incentives until a more comprehensive and permanent reform is decided upon. Doing otherwise would disrupt and deter investment. Just look at the effect of tax policy uncertainty on the American wind industry. With extension of the PTC in question, wind turbine manufacturing is grinding to a halt, putting 37,500 jobs and the future of profitable U.S. industries at risk. America can’t afford this, especially now. So until we figure out our long-term strategy for leveling the playing field while maintaining technology on-ramps, it is imperative that we continue our current support for promising energy technologies.