A high ranking official at the Department of Energy (DOE) recently commented that given the importance that tax policy plays in our energy policy, the staff at DOE was working to build a relationship between Secretary Chu and Secretary Geithner.  There is no question that they are definitely on to something, as few people recognize the importance of tax policy as it relates to energy policy.

In fact, the Obama Administration requested about $4.2 billion in direct appropriations in FY 2011 for energy efficiency and renewable energy, fossil energy, nuclear energy, and power delivery.  That request, however, pales in comparison to the $16.4 billion in tax expenditures for energy related programs in FY 2011.

Tax expenditures essentially are government spending programs that are implemented through the Internal Revenue Code.  Certain income tax provisions are referred to as tax expenditures because they are similar to direct expenditures, especially those direct spending programs which have no spending limits, and which are available as entitlements.  Tax expenditures are similar to spending programs in that they intended to accomplish policy goal unrelated to equitable tax collection.  They are like entitlements because they are not subject to annual budget appropriations, but are paid out to any qualifying taxpayer regardless of the total cost.

For instance, in the FY 2011 budget request DOE has requested $760 million for fossil energy programs.  Tax expenditures related to fossil energy are projected to be over $2 billion.  The FY 2011 budget request for energy efficiency and renewable energy is $2.355 billion.  Yet, tax expenditures related to energy efficiency and renewable energy are projected to be over $11 billion, of which $8.9 billion is the ethanol tax credit.

The primary challenge with this system is that in setting spending priorities, it would generally make sense to take the funds available for energy policy and decide how to spend the total based on priorities.  Yet, by keeping the tax expenditures and direct expenditures in separate parts of the policy process, we never really determine whether we have all of our spending priorities in order.  For instance, do we really think that over 40 percent of all spending ($4.2 billion in direct appropriations and $16 billion in tax expenditures) should fund the ethanol tax credit? In a more rational system, we would consider the relative priorities of all policies, but as currently constituted, the system discourages such analysis.

As we work to improve the effectiveness of our energy policy, and as we move into a tight budget environment, we need to think very carefully about how we spend every dollar and make sure that our spending priorities reflect our policy priorities.

Perhaps we all should be working to make sure that Secretaries Chu and Geitner become close friends, quickly.

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