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Wednesday, August 30, 2017

A Note on Wind Energy Taxation

This article is a follow-up on a vigorous debate on my Facebook page about wind energy taxation. 

Over the summer, this issue has gotten more wind in its sails (no pun intended, of course...), and it is likely going to become a major topic of deliberation during the legislative session. Before we get to the meat of the issue, though, let me thank the main participants in the Facebook debate, John Brown, M Lee Hasenauer and Matt Micheli, for keeping it civil and respectful. That is how we do it here in Wyoming, and that is exactly the way I want it on my Facebook page. In this day and age, when people throw verbal rocks at each other for the rhetorical equivalent of a scratched finger, it is great to see such intelligent - yet vigorous - discussions between grown-ups. 

The wind energy tax has many sides to it, as the FB discussants demonstrated. There is the principled approach, and the public policy approach, and as always, it is difficult to make the two meet. Yet that is precisely what we need to do; too many people withdraw to the convenience of the principled ivory tower and resort to argumentative sniping fire the only contributions of which are exhausting reiterations of the same libertarian principles. 

By the same token, too many politicians who claim to be libertarians or conservatives, ignore the principles simply because it is easier to engage in the short-term ebb and flow of politics, and to turn legislative matters into issues of mere technical importance. Neither practice is satisfactory, and neither practice will make a difference for the better. 

The hard part is to bring principles and the practice of public policy together. The wind energy tax is a great example of where that needs to happen, and why it is so difficult. So let us give it a try. 

The principled viewpoint - based on economic theory and old-school libertarianism - is that government should neither tax nor subsidize any productive economic activity qua productive economic activity. It is neither sound economics nor the practice of a minimal state to engage in economic redistribution of any kind.Again, if we just wanted to make the principled argument, we would stop here. The problem is that our state legislature has - no matter how much we dislike it - built a pretty darn big welfare state that needs short-term funding and maintenance. A simple, principled no to any wind-farm taxation or subsidies will not be of any help to our legislators as they go into the 2018 legislative session. 

That said, we cannot leave the principles out, because if we did, we would have no direction in our ambitions to reform our fiscally unsustainable government. One argument for wind farms is, namely, to provide a new revenue stream comparable to the severance tax on minerals. A wind severance tax of sorts would, it is said, supplant revenue from existing severance taxes and - explicitly or implicitly - allow our state government to continue its operations. It would give the impression that our state government is no longer fiscally unsustainable.

The problem with this purely practical approach is that it ignored the negative impact, both short term and long term, that our state and local governments have on our economy - especially since our government sector here in Wyoming is the largest in the country. If we, based on a purely practical approach, add a wind severance tax to the roster of taxes we already have, then we do the same thing as if we broadened the sales tax, added a gross receipts tax or expanded the gross property tax to other items than it currently covers.

With that in mind, though, there is one economic argument for a wind severance tax that we need to take into account. This argument, which runs separately from the issue of the size of our government, has to do with what economists refer to as "welfare effects" (not to be confused with welfare as an entitlement policy) and "neutrality" in taxation.

Without getting too technical (though you can easily study up on this by pulling a microeconomics textbook off the shelf at your local library) the point here is that government should not be biased in favor of, or against, some businesses competing on the same market. In this case, wind energy producers compete with coal and natural gas producers for the production of energy. If we ignore the technical differences between wind and coal (differences that M Lee Hasenauer summarized well in one of his comments on my FB page) the point here is that if government taxes coal but not wind, then wind is de facto getting an advantage on the free market by being able to charge a lower per-KwH price.

This is, again, under the assumption that all other things are equal. Yet the point is valid: government does enough to distort and slow down the free-market economy as it is; we do not need another imbalance created by the difference in taxation between minerals and wind.

If we limit the discussion to this practical problem, and ignored principles, it would be easy to conclude that:

a) we have a fiscally unsustainable government; therefore
b) we need a wind severance tax that levels the taxation playing field between wind and coal.

While point (a) is correct, point (b) is the uninformed conclusion. If we take a step back and bring back the principles of free-market economics and old-school libertarianism, we are pointed in a rather different direction.

Before we proceed, let me make clear that the principles of free-market economics are not just virtuous principles, but work very well in and by themselves. Without regurgitating the same evidence all over again here (though I'll be happy to do so for anyone asking) we have decades of evidence that free-market Capitalism is superior to any alternative socio-economic organization. In other words, when we rely on the principles of the free market to guide us in our policy decisions, we rely on both good theory and solid experience.

With that in mind, let us rethink the problem at hand. We still have a fiscally unsustainable government, but by taking into account the long-term positive effects of free markets and limited government, we add a dimension to this that fundamentally changes the outcome of our reasoning. The point is no longer to plug a revenue hole in the state budget, but to use the difference between wind and coal as a guideline for reforming the role of government in our state.


(1) we have a fiscally unsustainable government;
(2) we have a big government that holds back our private sector, directly and indirectly; therefore
(3) we need a tax policy that encourages structural, free-market oriented reforms to our government.

Point (3) would solve the problems in both points (1) and (2): the smaller government gets by means of the right kind of reforms, the more macroeconomic growth we see; the more growth we see, the more tax revenue we get at any given level of taxation; the more tax revenue we get, the more we can cut taxes and further reduce the size of government.

So how does this reasoning inform our decision on the wind severance tax? There are two alternatives, The Bold and The Mild:

The Bold alternative means that we keep wind tax free. We then use the absence of a wind severance tax as a policy goal to gradually reduce the tax burden on minerals. We do this not by just cutting taxes and hoping for the best, but by structurally reducing the size of our state and local governments. As we do, we free up "fiscal space", so to speak, to start cutting taxes on the minerals industry. Once we have set course for the limited government that is only preoccupied with protecting life, liberty and property, we can restructure the tax system we have so that this limited government is fiscally sustainable.

The Mild alternative means that we place a severance tax on wind energy, competitive with other states (thank you, Matt Micheli, for outlining the tax-competition argument in the FB discussion) and let the competitiveness of that tax place a firm cap on the rate. We then bring down severance taxes to that same level, again doing so by means of structural reforms to our state and local governments. The pace of reduction in the size of government is not going to be as fast, and we may not even see a purely limited government in our lifetime under this scenario. That said, it is a far better strategy than trying to find our footing on the wind-energy tax issue without any principled guidelines at hand.

Needless to say, my recommendation is that the legislature choose The Bold alternative. However, if all they can muster is The Mild alternative, then at least we have turned a corner and will be moving in the right direction.

1 comment:

  1. Go for the Bold - eliminate taxation on minerals and don't start in on wind.