Budget & Tax
Byron Schlomach, Ph.D. | January 30, 2018
Stop conspiring with zero emissions
Byron Schlomach, Ph.D.
This article was published in OCPA's Perspective magazine View Issue
Suppose I told you of a way to imperil the state’s budget, force needless investment spending in an industry that everyone depends on so everyone must help to pay for that spending, destabilize the electric grid, and hand millions of dollars to foreign companies, all at the same time. It sounds like a plot from a spy movie, or maybe some cockamamie conspiracy theory off a paranoid website. But it’s not. It’s real. It’s happening in Oklahoma right now.
What’s worse, our state legislature has actively participated in this plot, although it has been taking steps of late to wash its hands of the affair. There is still more to be done, though, if the legislature is to be rid of this scandal.
I’ve just described the wind generation industry in Oklahoma. Even though new state income tax credits are no longer being granted, the state’s budget will continue to bleed potential revenue—hundreds of millions of dollars, all told—for years to come on wind projects already in the program. Since these credits are “refundable,” the state does not just lose revenue, but actively pays for some projects since their credits are worth more than their income tax liability in the first place.
Since wind generation plants are located far away from where the bulk of the demand for electricity occurs, all rate payers (i.e., everybody in the state) must pay for the new and upgraded transmission lines to connect electricity users with the turbines. Meanwhile, the electric grid is at risk since the wind, even in Oklahoma, does not always blow. We could very well find ourselves without adequate generation capacity on an unusually windless day in the future. And foreign companies are often the primary beneficiaries of the tax treatments the legislature bestows, either as initial investors or when buyouts occur.
The fact is that federal zero emission tax credits dwarf the state’s. For this reason, wind plants are likely to continue to be built even if the state directly taxes them. Thus, the legislature should end all favorable tax treatments for zero emission plants that remain. Two tax favors, in particular, should end right away.
First, tax credits already promised and in place must be honored, but a tax credit is different from a subsidy. These credits do not have to remain refundable. That is, the state should not pay a producer the difference between a credit that is worth more than what the producer’s tax liability would have been without the credit. This is a direct payout from the state’s treasury, and the Oklahoma Supreme Court has ruled, in Ali v. Fallin, that the state is not obligated to maintain such payments into the future.
Second, the state has a sales tax exemption for manufacturers for good economic reason. The exemption is designed to prevent tax pyramiding, where taxes are paid on taxes. However, this exemption does not extend to oil and gas equipment. Why? Because Oklahoma is rich in oil and gas, and it is common for commodity-rich states to tax those very commodities in order to place the tax burden on broad shoulders in what is, after all, a low-cost industry compared to other states. Oklahoma has been called the Saudi Arabia of wind. Wind would seem to have the same broad shoulders as oil and gas.
Finally, the legislature should repeal its zero-emission tax credit for all sources of zero-emission power, not just wind. The main threat to Oklahoma’s budget and power grid in the future is solar power. As long as that law remains on the books, we are at risk from solar for exactly the same reasons that wind has been a bad deal for Oklahoma’s taxpayers.
In the future, perhaps an inexpensive battery technology will finally be developed that will make zero-emission generators truly economically competitive with fossil fuel-powered electric generation. Until that time, the legislature needs to stop conspiring against its own constituents.
Byron Schlomach, Ph.D.
Byron Schlomach (Ph.D. in economics, Texas A&M University) served as director of the Center for Economic Prosperity at the Goldwater Institute, and prior to that was chief economist for the Texas Public Policy Foundation.