Grover Norquist points out that repealing any tax credit without balancing tax rate cuts is a violation of a pledge signed by many Republican Legislators. Norquist is a Hero of the Revolution and deserves great respect and credit for creating Americans for Tax Reform and its pledge that focuses Republican opposition to increased taxes. However, anyone who agrees with Grover and ATR that cutting a tax credit is a tax increase needs to think more clearly.
The WSJ described the ethanol credit succinctly
- Gasoline blenders currently get a tax credit of 45 cents for every gallon of ethanol they blend with motor fuel. Tuesday's amendment would repeal that as well as a tariff of 54 cents a gallon on imported ethanol.
In the common parlance a subsidy is money paid to a business by a government for other than the delivery of goods or services to the government.
Note that it doesn't matter how the subsidy is paid. It's a subsidy whether the business gets a check directly from the government or whether they get payment from the government's tax agency when they file their taxes in the form of a reduction of taxes owed, extending even to a refund of any excess of the subsidy over taxes owed. Any such straight-dollar-amount reduction of taxes owed is nothing but a payment by the government to the business.
The ethanol blender's credit is exactly like that. It's a straight payment through the IRS of 45 cents per gallon for ethanol blended into gasoline. The value of it is 45 cents per gallon, not the business's marginal tax rate times the amount of some business expense. It's just 45 cents per gallon in chits that can be used to pay taxes or get a refund; it's 45 cents per gallon of straight subsidy payment.
Like all business tax credits, the ethanol blender's credit not a tax deduction of a business expense against income. Deductions come in before the tax is computed, and tax credits come after the tax amount is determined. What is most important about it and every other tax credit is that they are for something other than income production: they are to entice the business into some uneconomic activity in which it would not otherwise engage.
The ATR pledge was developed in the days of the starve-the-beast strategy: cut taxes to clamp a lid on government spending. In these days of unlimited deficits funded by Federal Reserve devaluation of the dollar, spending itself -- the true taxation -- must be the focus.
But ATR's pledge is deeply flawed on cutting tax credits. Every single subsidy payment to businesses or transfer payment to individuals could be paid through refundable tax credits; every single one! The Earned Income Tax Credit is a welfare payment made by the IRS in the form of a refundable tax credit; It's nothing but straight spending. Yet the ATR pledge would require "dollar for dollar cuts in tax rates" for any cut in the EITC. While tax rate cuts are often desirable, no one should be criticized for cutting the EITC and thereby spending without cutting tax rates.
I invite Grover Norquist to immediately call a news conference and announce that henceforth, ATR judgement is that those who vote against tax credits that hide back-door spending will not be criticized by ATR for violating the previous pledge. He should then release a new pledge that omits all mention of tax credits or at least adjusts the language on them.
Conservatives should not support a central planning subsidy just because it's wrapped in a cloak of tax-credit invisibility. The first rule for Republicans must be, "If it's a subsidy, vote against it."
Finally, the House should immediately pass a clean repeal of the ethanol credit and return it to the Senate. It might end up on the President's desk and embarrass him into signing it or, perhaps better still, entice him to veto it. In either case Republicans will then have stood firm for the principle of less central planning.
