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VALVO: Energy subsidies threaten to break GOP’s small-government promise

Republicans welcome central planners to natural gas market

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In November, Republicans rode a wave of anti-big-government sentiment to take back the House of Representatives. They did so by promising that they had learned their lesson and would not drift back toward the big-government policies of the Bush-Hastert years. On energy policy, the GOP promised a free-market approach that would get government out of the way and allow American resources to be developed. They did not campaign on central economic planning, yet dozens of House Republicans are lining up to use the tax code to pick winners and losers in the energy industry.

U.S. Rep. John Sullivan, Oklahoma Republican, introduced the NAT GAS Act (H.R. 1380), a bill to put a thumb on the scale and tilt the country from a gasoline- to a natural-gas-vehicle fleet. The bill provides tax credits between $7,000 and $64,000 for vehicle purchasers and $10,000 for vehicle producers; extends the 50-cent-per-gallon credit for natural-gas producers and allows tax benefits for infrastructure installation. All in all, it's an astonishingly comprehensive effort by government to pick a favored energy source and prop it up. The bill already has more than 185 co-sponsors - including more than 75 Republicans - which is disappointing, considering that the GOP should be working to lower overall tax rates and reduce complexity instead of adding more special-interest carve-outs.

The NAT GAS Act is not new; Sen. Robert Menendez, New Jersey Democrat, introduced a similar version in the Senate in 2009 along with Sens. Orrin G. Hatch, Utah Republican, and Tom Coburn, Oklahoma Republican. Even after Senate Majority Leader Harry Reid lent his support to Mr. Menendez's efforts, the bill couldn't engender enough support to pass. Fast-forward two years, and the House GOP is picking up where the Democrat-led Senate left off, only with noticeably more co-sponsors.

Instead of trying to subsidize fossil fuels in an arms race to match the wide array of subsidies for renewables, it's time for Washington to get out of the energy-subsidy business. The energy industry, like the rest of the economy, should have a tax code with a low rate, flat structure and few exemptions. Ethanol, natural gas, solar, wind and, yes, oil should all have to play by the same rules. Ethanol's $6 billion-a-year tax credit has got to go. The NAT GAS Act should be rejected out of hand. Wind and solar energy should lose their option of a 30 percent investment tax credit or a 2.2-cent-per-kilowatt-hour production tax credit. Oil subsidies - principally the Enhanced Oil Recovery Tax Credit and the Marginal Well Production Credit - also should be eliminated. Providing a level playing field where the market can choose which type of energy makes the most sense for the American economy is a key element of our economic recovery and reordering our disastrous federal finances.

Blocking new subsidies and removing existing ones, however, should not be confused with maintaining the proper tax treatment of investment, research and development. The tax code should allow all types of saving and future investments to occur tax-free in order to avoid double taxation of those dollars. All energy companies should retain access to the Section 199 domestic production activities deduction, the dual capacity rules that allow deduction of foreign taxes from domestic taxable income, the research and experimentation credit, the intangible-drilling-costs deduction and the immediate expensing of capital investments. These broadly available, flat and evenly applied tax rules should not be confused with subsidies that are put in place to advantage one industry over another.

When Republicans make backroom deals with industry lobbyists to restructure the tax code to benefit parochial interests - such as special tax treatment for natural-gas-vehicle producers, consumers and infrastructure - they undermine all of the headway that conservative activists have made in the country revealing the central planning engaged in by President Obama, former House Speaker Nancy Pelosi and Mr. Reid.

It's time for parochial interests to give way to national concerns. Doing away with special tax provisions that benefit one energy source over another is a good place to start. Republicans must present a real free-market alternative, not redirect the same market-distorting policies toward their own preferred energy technologies.

James Valvo is director of government affairs at Americans for Prosperity.

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