Proponents argue that economic development incentives—such as tax credits—provide a multitude of benefits to taxpayers and society at large. This apparent popularity could be due to the perception that government subsidies effectively “have no downside and cost taxpayers nothing.” However, this is simply not the case. Tax breaks do, in fact, have a downside and impose a huge cost to the taxpayer. For instance, when looking at renewable energy subsidies in the State of Texas, “we estimate the total cost to taxpayers and consumers of these subsidies in Texas from 2006 to 2029 to be $36 billion.”
While these subsidies certainly do their job in incentivizing investment in particular businesses or industries (for better or for worse), they can also incentivize investors to be more “lax” in effectively examining the health of the underlying business prior to investment. In short, investors may be more inclined to “jump the gun” in order to take full advantage of tax credits promised by the government.
This is illustrated through the collapse of DC Solar, a former California renewable energy celebrity company. In December 2018, law enforcement agents arrested its owners because the company “had become a front to parlay a do-good incentive to encourage solar investments into an $800 million fraud scheme.” The owners had managed to entice sophisticated investors through promising huge federal tax credits in return for investment in their “clean energy” corporation; however, the government reported that the company “engaged in nearly no legitimate business.” As a result, many investors were forced to take charges against earnings on these credits that they originally thought were worth millions.
This incident alone illustrates just how tax credits in general can be exploited. You may ask, “How can this happen? How can such enormous investors, such as Berkshire Hathaway and Progressive Corp., fall for such a fraud?” The short answer is: This type of behavior is not uncommon. People and companies eager to reap the benefits of these credits sometimes don’t allow the hard facts to stand in their way.
After the DC Solar scandal emerged, Progressive spokesman Jeff Sibel iterated that, when initially investing in DC Solar, “the goal was to earn ‘attractive investment returns’ and to support the environment.” Since the federal tax credit was implemented in 2006, many of the nation’s largest corporations have increasingly invested in renewable energy to benefit from the associated tax credits. Companies such as JPMorgan, Chase & Co., Bank of America Corp., and even Sherwin Williams Co. (who was also one of DC Solar’s investors) all now invest in renewable energy, perhaps for the same reasons as laid out by Sibel and Progressive Corp.
Legislators and members of the public might ask themselves – are these tax credits really worth it? Because the facts on the ground seem to indicate that these associated risks of subsidies have become a trend and, effectively, cause more harm than good, leading to negligent investment decisions and government-dictated preferential treatment—all at the expense of the taxpayer.
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