Tax Expenditures for the Chopping Block: Energy Subsidies

This article is part of an ongoing series of pieces that focus on individual tax expenditures that policymakers might consider eliminating or reforming to address America’s dire fiscal trajectory. Previous articles in this series have addressed the low-income housing tax credit, tax-exempt interest on municipal bonds, the state and local tax deduction and the earned income tax credit.

Since the 1970s, the government has offered tax credits and subsidies to promote energy conservation, renewable energy and fuel efficiency. For example, the Energy Policy Act of 1992 created the energy production tax credit (PTC)—a tax credit for corporations that produce or invest in renewable energy sources.

In addition to the PTC, the federal tax code includes more than two dozen tax credits and subsidies for corporations producing and investing in energy production and for consumers who use clean energy. Some of these include the energy investment tax credit for corporations and individual tax credits for “clean” vehicles and energy-efficient property. These tax credits and subsidies are well-intentioned; aiming to mitigate the harms of climate change. But they are also expensive, inefficient and regressive, benefiting a few wealthy corporations and individuals while other taxpayers bear the costs.

Expensive Exemptions

Energy tax credits and subsidies may have environmental benefits, but they also come with significant costs. These energy subsidies are estimated to cost the government an average of $66 billion annually—or, according to a Treasury estimate, $668 billion over the coming decade (2024-2033).

Moreover, these estimates significantly understate the true cost of these tax subsidies. The Inflation Reduction Act (IRA) of 2022 massively expanded and extended energy production and investment tax credits, and the costs of these new credits don’t yet appear in Treasury’s data. The Brookings Institution estimates that the tax credit provisions of the IRA would cost $780 billion by 2031, as most of the credits are uncapped. Another estimate by Goldman Sachs forecasts that the uncapped tax credits will cost an eye-watering $1.2 trillion. One estimate suggests that the long-term costs of the PTC alone could reach $3 trillion by 2050.

Picking Winners and Losers

In addition to being expensive, tax credits and subsidies that support the renewable energy industry distort market signals and risk funneling resources away from potentially more efficient or innovative alternatives, leading to resource misallocation and hampering competition. Rather than boosting efficiency, energy subsidies make the industry more dependent on government handouts and less responsive to consumer interests. As the Cato Institute’s Adam Michel notes:

Instead of being temporary support for nascent industries—as originally intended—the federal subsidies create sclerotic, subsidy-dependent industries that are more responsive to public money than consumer demands.

Government energy subsidies like the PTC often result in some companies (or industries) getting an unfair advantage. By far the largest benefits of the PTC are concentrated among a small number of energy corporations that construct wind turbines. One analysis found that three-fourths of the PTC’s allocated resources are concentrated in just 15 energy companies, 7 of which are foreign corporations. Most of these same corporations are represented by the American Clean Power Association, a trade association that lobbies for corporate welfare in the energy production sector. Prior analysis has also found that many of these 15 companies receiving the PTC received enough transfers in the form of the PTC and other subsidies to fully offset their total income tax obligations.

The three biggest winners in the manufacturing sector for wind turbine production are hardly small-business underdogs: General Electric, Vestas and Siemens Gamesa, which collectively produce 79% of all turbines. These companies are also on the American Clean Power Association’s board of directors, along with companies like JPMorgan Chase & Co. and Bank of America Merrill Lynch.

Ultimately, the government doesn’t know where the productive and innovative players in the market are. By showering a select few large corporations with subsidies, they are shifting capital away from the productive and innovative potential of players that are excluded from their government-granted privilege. As the late economist Don Lavoie noted: “[A]ny argument for offering subsidies in the form of cheap credit to some favored industries, whether old or new, is also an argument for penalizing other (possibly unidentified) industries.”

Highly Regressive Subsidies

Given the concentration of energy subsidies among large multinational corporations, it should come as no surprise that the distributional impact of “clean energy” subsidies is highly regressive—that is, benefiting a wealthy few at the expense of everyone else. However, this doesn’t apply only to the direct subsidies to large corporations; consumer subsidies for clean energy usage are just as bad in this regard.

Prior research by the Joint Committee on Taxation found that tax subsidies for electric vehicles are both highly regressive and largely captured by the biggest corporations (Tesla, Ford, GM). One estimate from 2019 found that half the cost in forgone revenues from giving a tax break to these corporations goes right into their pockets.

Meanwhile, almost four-fifths of taxpayers claiming the deduction for buying an electric vehicle had an adjusted gross income of $100,000 or more. This suggests clean vehicle subsidies overwhelmingly benefit a select few wealthy individuals at the cost of the American taxpayer.

While the IRA placed some income limits on eligibility for its clean vehicle subsidies, the act excluded only the top 3% of households, which means many ordinary taxpayers would still only receive a fraction of the benefit. For example, according to IRS Statistics of Income data, 55% of taxpayers had adjusted gross income below $50,000 in 2021, with an average tax liability of $1,784. Even if these taxpayers filed for the electric vehicle tax credit, they would receive less than one-quarter of the full amount available for the tax credit ($7,500), because taxpayers can’t receive more from the credit than they owe in taxes. The regressive nature of subsidizing electric vehicle ownership is even more obvious when we consider that upper-income households ($100,000 or more) are 7 times as likely as lower-income households (less than $40,000) to own an electric car.

Corporate subsidies for energy companies also harm globalization, free trade and important global ties with our allies by acting as trade barriers. When the Biden administration expanded corporate subsidies under the IRA, the European Commission rightfully noted in a letter submitted to the U.S. Treasury:

The Act risks causing not only economic damage to both the US and its closest trading partners, resulting in inefficiencies and market distortions, but could also trigger a harmful global subsidy race to the bottom on key technologies and inputs for the green transition.

The current framework of energy subsidies distorts market dynamics and results in significant fiscal costs. By favoring specific industries, these subsidies create dependency and stifle innovation, rather than allowing market forces to drive efficiency and technological advancements. The regressive nature of these subsidies disproportionately benefits large corporations and wealthy individuals.

The most prudent course of action would be to eliminate these subsidies altogether. A less effective yet perhaps more politically attainable option would involve scaling back just the IRA provisions, including expanded and uncapped energy subsidies. This move would at least signal that policymakers are serious about lowering our fiscal deficit in ways that reduce market distortions.