Time to Let Wind Credit Die

Milton Friedman used to say that nothing is so permanent as a temporary government program.

In today's crony political climate, that's especially true for corporate handouts like the production tax credit. The wind industries' lucrative benefit has expired and been revived on multiple occasions since its creation two decades ago.

It's now well past time that it be put to rest for good.

[sharequote align="center"]Wind power deserves to be told the days of riding the taxpayer gravy train are coming to an end.[/sharequote]

Created in 1992, this tax credit was argued as necessary assistance for a fledgling industry, intended only to help get wind production started until producers could be left to their own devices. It was a questionable choice given that in a dynamic free market economy, industries constantly emerge – and companies are started every day – that do not require government handouts.

But what's done is done. What matters now is ensuring this tax credit doesn't morph from a temporary helping hand into a permanent crutch, and Rep. Kenny Marchant (R-Texas) deserves credit for trying to prevent just that.

The credit provides a subsidy of 2.3 cents per kilowatt-hour ($23 per megawatt-hour) of energy produced for the first 10 years of a project's operation. That's approximately equal to the wholesale price of electricity, meaning wind producers can receive more than double their competitors on the wholesale market.

This introduces a powerful distortion into the energy market that hurts consumers in the long run. Wind producers receiving the subsidy are able to drastically underbid competitors and still make a considerable profit thanks to taxpayers. But wind power is intermittent and highly variable, and therefore makes for a risky primary source of power. Grid operators have to compensate by increasing backup power, adding to operational costs.

To make matters worse, the credit incentivizes production regardless of demand. An extreme energy surplus can cause prices to go negative, whereby producers actually pay buyers to take their energy. Normally this discourages further production when it is not needed, but because the tax credit pays strictly based on production – it's in the name, after all – wind producers who receive the credit can still profit from producing unnecessary energy. The cost of this extreme waste is then borne by taxpayers.

AFP PHOTO/Tony KARUMBA

The credit was supposed to have expired again for 2014, meaning that no new facilities beginning construction or operation would become eligible for the credit, though any that had already done so would continue to benefit for the rest of their 10-year window. But at the very end of 2014 Congress authorized a retroactive extension to expand the eligibility through the end of the year, at which point the tax credit again "expired."

Given its history of repeated resurrections, until its authority is completely removed there is danger of the credit returning at any moment to obligate taxpayers to another 10 years of handouts for new facilities.

While the ideal might be to end the tax credit immediately and cutoff current recipients, that solution is unlikely to find enough political support and could cause undue economic disruption. An orderly withdrawal then provides the most practical option, and that's exactly what recently introduced legislation, H.R. 1901, from Representatives Kenny Marchant (R-Texas) and Mike Pompeo (R-Kan.) would provide.

Their Production Tax Credit Elimination Act would codify the end of the eligibility period as Dec. 31, 2014 so that no new facilities may qualify, repeal the entire section from the Internal Revenue Code once the last eligible payments are made, and end the credit's inflation adjustment to reduce costs in the meantime. And instead of spending the estimated savings of $9.6 billion on other wasteful schemes, the bill returns it to the economy through tax reductions.

Proponents of the Production Tax Credit claim that the wind industry is being harmed by uncertainty over the status of the credit, which they'd prefer to rectify in the form of a lengthy extension and yet more burdens on taxpayers.

Reviving the handout isn't warranted, but they're right on one point. The industry deserves to finally be told by Congress in no uncertain terms that the days of riding the taxpayer gravy train are coming to an end.

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