The tax cuts adopted during the first Trump administration as part of the 2017 Tax Cuts and Jobs Act are set to expire by the end of next year, putting extra pressure on the next Congress to adopt another tax reform. Republicans will likely try to extend those cuts as part of a budget reconciliation bill, and making them permanent would cost $3.5 trillion. This means legislators will be looking for subsidies to cut to pay for an extension. A likely source of funds is the roughly $1.2 trillion in clean energy subsidies (mostly in the form of tax credits) under the Inflation Reduction Act (IRA). The major question for lawmakers will be which is more worthwhile—the IRA tax credits or a continuation of the Trump tax cuts? In that vein, it is worth understanding the cost of energy subsidies and under what conditions they can achieve their hoped-for benefits.
The most basic (and, unfortunately, universally underappreciated) element of tax policy is that every dollar of subsidy the government spends must be paid for by a dollar extracted from a taxpayer. If deficits are used to pay for the subsidy, then the taxpayer will pay a dollar later plus interest. And because that taxpayer has lost the opportunity to spend their dollar on something with more utility, the overall efficiency of capital allocation becomes distorted.
The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.
