Tax Credits and Subsidies

By Laurence M. Vance


Do tax credits -- as well as tax deductions, tax loopholes, tax shelters, and tax exemptions -- constitute subsidies? Many Republicans and conservatives think so.
Senate Republicans are divided over a proposal to eliminate the Volumetric Ethanol Excise Tax Credit. An amendment to that end (S.Admt.436) by Senator Tom Coburn (R-OK) to the Economic Development Revitalization Act of 2011 (S.782), a bill to amend and reauthorize the Public Works and Economic Development Act of 1965, was recently defeated with 34 out of 47 Republicans supporting the amendment.
The amendment follows a previous attempt by Coburn to do the same thing with a stand-alone bill, S.520, currently languishing in the Committee on Finance.


Conservative groups like The Club for Growth and Koch Industries supported the amendment while Americans for Tax Reform opposed it.
Coburn's amendment would have amended the Internal Revenue Code, subtitle A, chapter 1, subchapter A, part IV, subpart D, section 40(h)(2) and subtitle F, chapter 65, subchapter B, sections 6426(b)(6) and 6427(e)(6)(A) to eliminate income tax and excise tax credits on ethanol fuel production.
Two days later, however, Senator Dianne Feinstein (D�"CA) introduced basically the same amendment, and it passed by a vote of 73�"27. This time 33 out of 47 Republicans supported the amendment. (Saxby Chambliss of George switched his voted.)
Although distilling ethanol is an inefficient energy-intensive process and using ethanol as a fuel is fraught with problems since ethanol is corrosive, more flammable than gasoline, absorbs water, and lowers gas mileage, the veracity of these things is not the issue here.
There are five reasons why Coburn's amendment is a sham and a complete waste of time.
First, as mentioned above, Coburn proposed an amendment to a Senate bill to amend and reauthorize the Public Works and Economic Development Act of 1965. The Congressional Budget Office estimates that implementing this bill would cost about $1.5 billion through 2016 and an additional $760 million after that year. Yet, because the Economic Development Revitalization Act provides grants and other types of assistance to encourage economic development in distressed areas and redevelop abandoned or underdeveloped property no Republican who claims to follow the Constitution should ever consider voting for this bill no matter how many “good” amendments it contains.
Second, the tax credits for the ethanol industry that Senator Coburn is so concerned about expire at the end of 2011. They can only be continued if Congress specifically authorizes them to do so like it has done for the past several years. Why the big push to eliminate them now if they are going to expire soon anyway? Hasn't Congress got more important things to do now than tinker with the tax code?
Third, the amount of the tax credits is, according to Senator Coburn, about $3 billion a year. This is insignificant compared to the $10 billion the United States is spending per week fighting in Iraq and Afghanistan. (And yes, U.S. soldiers are still dying in Iraq.) If Republicans want to show us what budget cutters they are, then why don't they stop funding these senseless foreign wars?
Fourth, where were all the Republican calls to stop “subsidizing” the ethanol industry when they controlled the Congress for over four years during the Bush administration? With a majority in the House and the Senate, and control of the presidency, Republicans could have eliminated every tax credit and subsidy in existence. Could Republican actions now have anything to do with an election looming and an incumbent Democratic president?
Fifth, and most significantly, Senate Republicans just voted overwhelming against a similar bill to reduce tax credits for the oil industry. In a 52�"48 procedural vote in which only two Republicans -- Susan Collins and Olympia Snowe, both of Maine -- voted “yes,” the Senate rejected S.940, the Close Big Oil Tax Loopholes Act. This bill would have likewise amended the Internal Revenue Code but to “deny to oil companies with gross receipts in excess of $1 billion in a taxable year and an average daily worldwide production of crude oil of at least 500,000 barrels a year”:

a foreign tax credit if such company is a dual capacity taxpayer, as defined by this Act; the tax deduction for income attributable to domestic production of oil, natural gas, or primary products thereof; the tax deduction for intangible drilling and development costs; the percentage depletion allowance for oil and gas wells; and the tax deduction for qualified tertiary injectant expenses. Why do Republicans want to reward the oil industry and punish the ethanol industry? Especially since most Republicans have no philosophical objections to government subsidies in the first place. This is why tens of billions of dollars in direct payments and other subsidies to farmers have survived in Congress for decades. Republicans in Congress are even now trying to dodge farm subsidy cuts. This is especially egregious since farmers receive actual subsidies, not just tax credits. Tax credits are not subsidies. Tax credits, like tax exemptions, deductions, shelters, and loopholes, allow people to keep more of their money in their pocket and out of the hands of the government. It doesn't matter what the tax credit is for; the result is the same. Only a statist who thinks that the government has an absolute right to a percentage of all income produced and that tax credits deprive the government of its claim to that percentage could object to individuals or businesses holding on to their own money. Statists on the left and the right both reason that since not every person in society benefits in the same way from all tax credits and deductions that no one should benefit from any of them. So, if ABC company is granted a tax credit for making widgets that XYZ company doesn't produce, and if Smith is given a tax deduction for having a swimming pool that Jones doesn't have, then the solution -- in the mind of a statist -- is for the tax credit and deduction to be stripped from ABC company and Smith instead of extended in some way to company XYZ and Jones. The tax code if full of credits and deductions that even those who complain about other credits and deductions would never want to get rid of. For the current tax year, taxpayers with children are entitled to an exemption of $3,700 for each child. Taxpayers with children who make under a certain level of income are entitled to an exemption of $3,700 for each child plus a child tax credit of $1,000 per child. People without children are entitled to neither. What's fair about that? Is this not rewarding people with children and punishing people without children? Furthermore, taxpayers that don't itemize deductions are entitled to a standard deduction of $5,800 for single individuals and $11,600 for married individuals filing a joint return. But an additional deduction is allowed to any taxpayer who is elderly or blind. Is the government subsidizing old age and blindness? Ideally, the only reason all tax credits, deductions, exemptions, shelter, and loopholes should be eliminated is that the income tax itself is eliminated. Practically, though, since the federal government is unlikely to eliminate the income tax in its entirety, lovers of liberty and property should work toward increasing the size and scope of every possible tax credit, deduction, exemption, shelter, and loophole and then lobbying for more of them. Every industry should get the same tax credits and deductions as the ethanol and oil industries. Every individual should likewise. Buy a new car? Tax credit. Paint your house? Tax deduction. Get another pet? Tax exemption. Join a bowling league? Tax shelter. Water your lawn? Tax loophole. Every penny of our money that we are able to keep out of the hands of the government is a good thing, whether it results from lower tax rates or an increase in tax credits. The result is the same. But tax credits are not subsidies.