Understanding the Energy Bill: What Tax Credits Really Mean

On July 29, 2005, Congress passed the final version of a long-awaited energy bill that supporters believe will make America more energy-secure. Critics say the bill fails to address global warming and does little to reduce the nation’s dependence on foreign oil.

It’s taken Congress five years to pass energy legislation, partly because legislators have competing interests – there’s a limited amount of money and each lawmaker wants to give a slice of the pie to the energy project in his or her state. Particularly in the House, where lawmakers are reelected every two years, state representatives want to bring home the bacon or "pork" as it is frequently called. But where some see pork, others see representatives working to serve their districts, which is, after all, their job.

The energy bill is an excellent example of how laws are made. House reps work for the economic health of their individual districts, while senators represent their states and guide the legislation according to a philosophical standpoint decided by majority rules. In the case of the energy bill, the dominating philosophy is to entrust energy innovation to private industry.

For this reason, the legislation is mostly a bundle of tax incentives, and the who and how much of those tax breaks then creates U.S. energy policy.

By sorting out who gets what, we the people can better understand our energy future.

The way tax credits shape energy policy

A tax credit reduces the amount of federal revenue that can then be used for things like highways, education, and healthcare. But industries that receive large tax breaks then have extra money to grow and expand, hire workers, and innovate.

It’s a theoretical tradeoff: the Treasury takes in less, but the private sector puts out more.

The bill includes $14.6 billion in tax incentives, with a net cost to the government of $6.9 billon between 2005 and 2010.

The Bush administration wanted to spend less, hoping to limit the tax incentives to $6.7 over the next ten years. They probably wanted to slash the price because they’ve vowed to cut the deficit in half in the next four years, and less tax revenue means more deficit spending. However, Bush does not plan to veto the more expensive bill.

Who gets what

The biggest winners are electricity utilities, clean coal, and oil and gas producers. All of them will get substantial tax breaks over the next ten years.

Electricity utilities get $3.1 billion in tax breaks.

Producers of "clean coal" – a new energy source – will get $2.95 billion.

Oil and gas producers receive $1.5 billion in tax breaks and won’t have to pay government royalties on certain deep-well drilling. Some royalties will go to a $500 million program that will help oil companies drill in the deep waters of the Gulf of Mexico.

Nuclear power facilities will get $278 million.

Alternative and renewable energy

The bill includes a substantial tax credit for hybrid and "lean-burn" diesel cars put on the road through 2010, costing $874 million.

Currently, hybrid owners can claim a $2000 deduction, but the new law offers a more valuable dollar-for-dollar tax credit, in which alternative vehicle owners get money for the fuel economy of the car as it compares with a 2002 model standard as well as the estimated lifetime fuel savings of the vehicle.

The bill also establishes a 30 percent credit up to $30,000 for investments in alternative refueling stations.

$2.75 billion in tax credits will go to energy produced through wind, geothermal, trash combustion facilities and other renewable energy.

Tax breaks will go to people who upgrade their appliances and heating and air conditioning systems for energy efficiency. Upgrading thermostats, fixing leaks, and replacing windows will land consumers a tax credit of up to $500.

Non-tax items

Negotiators dropped the fight over methyl tertiary butyl ether (MTBE), a petrochemical that helps gasoline to burn more cleanly but also pollutes groundwater. For years, lawmakers have been arguing about whether or not to protect MTBE producers from lawsuits over polluted water. The debate over MTBE helped to kill last year’s energy bill, so legislators decided not to include it this year.

The bill will repeal The Public Utility Holding Company Act, a 1935 law that prevents large utility companies from subsidizing unregulated side businesses with profits from regulated utilities. The depression-era law was enacted in response to the shady business practices of huge holding companies that controlled utilities in complex pyramid structures, where a few investors at the top held most of the shares of many subsidiary companies. In the early 1930s, three holding companies controlled almost half of the utility industry, resulting in inflated rates for consumers.

But energy companies argued that the law was outdated and hampers competition and investment in the electricity sector. Opponents warned that repealing the law could result in a wave of mergers, with high utility prices as the end result. Instead of PUHCA, the Federal Energy Regulatory Commission will oversee these mergers and acquisitions.

The end result

The energy bill emphasizes energy sources that we already use and rely on, especially electricity and oil.

But the bill doesn’t directly address the problems we have with oil and electricity, such as high gas prices and rolling blackouts, which rocked the country in the summer of 2003 and continue to be a problem. Supporters of the bill say that tax incentives will allow industries to innovate and improve the electricity grid, to find domestic sources of oil, and to come up with alternatives to natural gas.

Overall, the bill avoids strong government policy and standards, relying on industry to use the money saved through tax breaks to voluntarily fix current energy issues and address America’s future energy needs.

Critics say that the bill is a waste of money and does little to promote alternative and renewable sources of energy.

But consider bill sponsor Pete Domenici’s (R-NM) point of view: "It's very easy to criticize a bill of this magnitude…but if anybody thinks right now that we can pass in the United States Congress a bill to substantially change the American way of using automobiles, I ask them to stand up and we'll put it on the floor next week and see if they can do it. We cannot order Americans to buy smaller cars, little tiny cars, and we can't order them to stop buying cars. We can't do everything in this bill."

And consider Barak Obama’s (D-Ill.) point of view. He supports the bill but also critiques it: "We have missed an opportunity here...in not addressing what has to be one of the most significant problems that we face…I ask that we do not wait another 5 years before we work on the important issue of energy independence."

Find out here how your representatives voted on this bill.

How should we make the transition from limited energy sources like oil to renewable energy sources like solar, hydro, hydrogen, and wind power? Can we start to invest in new energy sou“ces while supporting traditional energy industries? How can we balance the environment and the current energy economy?

What do you think?

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Article Posted on: 7/30/2005