JOINT HEARING ON ENERGY TAX POLICY AND TAX REFORM
SUBCOMMITTEE ON SELECT REVENUE MEASURES
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
September 22, 2011
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
PETER J. ROSKAM, Illinois
|RICHARD E. NEAL, Massachusetts
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
SHELLEY BERKLEY, Nevada
COMMITTEE ON WAYS AND MEANS
DIANE BLACK, Tennessee
|JOHN LEWIS, Georgia
XAVIER BECERRA, California
RON KIND, Wisconsin
JIM MCDERMOTT, Washington
JON TRAUB, Staff Director
C O N T E N T S
The Honorable J. Russell George
Inspector General, Treasury Inspector General for Tax Administration, Washington, DC.
Mr. Richard E. Byrd, Jr.
Commissioner, Wage and Investment Division, Internal Revenue Service, Washington, DC.
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Subcommittee on Oversight
The subcommittees met, pursuant to notice, at 9:34 a.m., in Room 1100, Longworth House Office Building, Hon. Patrick Tiberi [chairman of the Subcommittee on Select Revenue Measures] presiding.
[The advisory of the hearing follows:]
*Chairman Tiberi. The hearing will come to order, a series of hearings on comprehensive tax reform. Today we will begin an examination of the energy tax policy and tax reform. I am glad this hearing will be a joint effort between the Select Revenue Measures Subcommittee and the Oversight Subcommittee. Both subcommittees play an important role in reviewing energy tax issues, the Oversight Subcommittee by examining the IRS’s administration of existing energy tax provisions, and the Select Revenue Measures Subcommittee by examining energy tax policies.
Today’s hearing will feature three panels of witnesses. The first panel will examine the IRS’s administration of so‑called energy green tax credits included in the American Recovery and Reinvestment Act of 2009. The second panel will examine different viewpoints on the proper role of the tax code in promoting energy policies. And finally, the third panel will examine H.R. 1380, the New Alternative Transportation to Give Americans Solution Act of 2011, introduced by Representative John Sullivan of Oklahoma, and fellow member of the Select Revenue Subcommittee, Representative John Larson of Connecticut.
I look forward to hearing from all three panels, so I will be brief and now yield to the ranking member of Select Revenue, Mr. Neal.
*Mr. Neal. Thank you, Mr. Chairman, and thank you for conducting this hearing.
Some may be surprised by how much the United States Government spends on energy policy through our tax code. According to the Energy Information Administration, for 2010 the value of direct federal financial interventions and subsidies in energy markets was estimated at about $37 billion. Of this total, about $16 billion, or approximately 44 percent, can be attributed to tax incentives.
In calling this hearing today, the chairman is raising an important point that warrants consideration: Should we be pursuing energy policy through the tax code? And if so, how do we do so in the most effective manner?
Over the years, Congress has enacted a number of energy tax incentives that have been quite successful. For example, the Recovery Act included the 48© clean energy manufacturing tax credit, providing a 30 percent credit for investments in facilities that manufacture clean energy products. According to the Department of Energy, the $2.3 billion allocation of tax credits will result in more than 17,000 jobs. This investment will be matched by as much as $5.4 billion in private sector funding, likely supporting up to 41,000 additional jobs.
On the other hand, when I read in late July that the largest oil companies reported another quarter of profitability, with one company reporting a 97 percent increase in profits, I had to once again question whether some profitable companies really need taxpayer subsidies. We spent about $2 billion each year on subsidies for the largest oil companies. In this time of record deficits, do we really see this as a smart investment by the government?
In focusing on oil production today, an interesting point to note is the emerging oil boom right here in the Americas. From Brazil to Argentina to Canada, even North Dakota, the Western Hemisphere is seeing an increase in oil discovery and production. This is a significant development that may ease our country’s dependence on Middle Eastern oil.
So, I am glad we are having this conversation ‑‑ and I emphasize the word “conversation,” Congress once worked upon the basis of a conversation ‑‑ examining our energy tax provisions. And I look forward to the testimony of all our witnesses today.
But I am also particularly pleased that we will be joined by one of my constituents, Hank Ziomek, who is the director of sales at Titeflex company in Springfield, a terrific success story. And Hank will be discussing how this formerly old‑line manufacturer has benefitted from and become more dependent on growth of the natural gas vehicle market.
Thanks, Mr. Chairman.
*Chairman Tiberi. Thank you, Mr. Neal. I am going to yield now to my good friend, the chairman of the Oversight Committee, Dr. Charles Boustany, for an opening statement.
*Chairman Boustany. Thank you, Chairman Tiberi, for holding this hearing. I would also like to welcome everybody to this morning’s hearing on energy tax policy and administration.
Let there be no doubt. This country lacks a comprehensive energy strategy to achieve energy security and create good‑paying American jobs.
Louisianans know natural gas will be an important part of our transition to new fuel sources for the 21st century. In addition to natural gas, we must ensure that traditional energy sources are affordable, and innovative technologies are allowed to flourish. Yet the Administration continues to advocate for job‑killing tax hikes on American energy producers. And these tax hikes will hit small, independent oil and gas companies, hurting job growth in this country, and really hurting our energy security.
At today’s hearing, we will consider the role of the tax code in our country’s energy policy, as well as IRS’s effectiveness in implementing existing tax incentives. In recent years, Congress has sought to promote the development and use of renewable energy by offering tax credits to businesses and individuals. Whether tax credits are an effective way of pursuing this policy, and whether the tax code is the appropriate way to do so are questions up for debate. And that’s why we’re having this conversation.
Critics have argued that incentives included in the Recovery Act, such as the non‑business energy property credit, the residential energy efficient property credit, and numerous plug‑in, electric, and alternative motor vehicle credits have not only failed to stimulate the use of alternative energy, but have also become a target of fraudulent claims, leading to billions of dollars a year in improperly claimed credits.
There is the case of the residential energy efficient property credit meant to promote energy‑saving home improvements. And the Treasury inspector general for tax administration found that hundreds of thousands of dollars of the credit went to prisoners and children, and nearly a third went to individuals with no proof of home ownership. The IRS was unable to verify whether tax payers that claimed these credits were indeed eligible to receive the credits, costing taxpayers hundreds of millions of dollars in 2009 alone.
Plug‑in, electric, and alternative motor vehicle credits have similarly suffered from poor administration and fraud. According to a recent report, although these credits were intended to promote the purchase of hybrid and electric vehicles, a lax eligibility review resulted in millions of improper payments.
For instance, even though the credit only applied to new vehicles, IRS allowed credits when returns listed years such as 1991, 1979, and, strangely enough, the year 1300. And they even allowed plug‑in and hybrid credits for vehicles such as Cadillac Escalade, Hummer H‑3, and the Harley Classic. One taxpayer successfully claimed a bicycle.
Given these problems, this morning’s hearing will examine whether these credits have served their intended energy policy goals, or whether these goals have been overshadowed by waste, fraud, and abuse of these credits. Further, it is our duty to ask the IRS what is it doing to detect these fraudulent claims, to ensure that taxpayer dollars spent on economic recovery are safeguarded from abuse. I look forward to hearing testimony today to help us craft responsible energy policy to unleash America’s energy potential.
Thank you, Mr. Chairman, I yield back.
*Chairman Tiberi. Thank you. I now yield to the ranking member of the Oversight Committee, my friend from Georgia, Mr. Lewis.
*Mr. Lewis. Well, thank you very much. I want to thank you, Chairman Tiberi and Chairman Boustany, for holding this hearing. Energy tax policy is an important topic as we work toward a greener America and the creation of jobs in the United States.
I am pleased that we will start this hearing by reviewing the administration of energy tax credits. In this context, it is important that we discuss the proper funding of the Internal Revenue Service. We need to examine whether the agency has the resources it needs to ensure compliance with these provisions. Simply put, agency funding impacts tax administration.
The testimony clearly states that the agency has limited resources to examine claims after the credits have been paid. I have serious concern that the Republican plan to cut $600 million from the agency’s budget will further damage its ability to administer energy and other tax credits.
The Republican budget will result in the furlough of over 4,000 employees. This furlough will harm administration and hurt the agency’s ability to detect and fight fraud. This cut will also increase the deficit and widen the tax gap. The agency collects between $4 and $7 for every $1 of funding. The Republican’s attempt to save $600 million actually will cause taxpayer more than $4 billion each year.
Any serious discussion of energy policy and tax reform must begin with fully funding the agency.
Investment in agency funding and tax incentives are critical to energy policy. They result in more choices for consumers and increased competition. Most importantly, they create jobs in the United States.
I want to thank the witnesses for being here today. I would like to extend a special welcome to the gentleman from the great city of Atlanta, Commissioner Byrd. Welcome. Thank you.
*Chairman Tiberi. Thank you, Mr. Chairman. Before I introduce the witnesses for the first panel, I ask unanimous consent that all Members’ written statements be included in the record.
*Chairman Tiberi. Without objection, so ordered. We will now turn to our first panel of witnesses, and I welcome the Honorable Russell George, Treasury inspector general for tax administration. And I also welcome Mr. Richard Byrd, Jr., commissioner, wage and investment division, Internal Revenue Service. Thank you both for joining us today. You will have ‑‑ you each have five minutes to present your testimony. And, obviously, your full written testimony will be submitted for the record.
General George, you can begin.
STATEMENT OF J. RUSSELL GEORGE, INSPECTOR GENERAL, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, WASHINGTON, D.C.
*Mr. George. Thank you, Chairman Tiberi. Good morning Chairman Boustany, Ranking Member Lewis, Ranking Member Neal, members of the subcommittee. Thank you for the opportunity to testify on the Internal Revenue Service’s administration of energy‑related tax credits.
The Recovery Act of 2009, contained 20 provisions, applicable to individual taxpayers, including a number of tax credits and deductions. The energy and motor vehicle provisions of the Recovery Act were non‑refundable credits and deductions.
The Plug‑in Electric and Alternative Motor Vehicle Credits provide taxpayers with a credit for the purchase or conversion to motor vehicles that operate on clean, renewable energy sources. During the period of January 1st through July 24, 2010, approximately 69,000 individuals – who electronically filed tax returns – claimed $164 million worth of those credits.
The Act provided two types of Residential Energy Credits to individuals to install energy efficient products in their principal residence, or install alternative energy equipment in their principal or secondary residences. Approximately 6.8 million individuals claimed $5.8 billion in Residential Energy Credits on their tax year 2009 returns.
The Qualified Motor Vehicle Deduction provided individuals with an additional deduction for State sales taxes and excise taxes on the purchase of certain motor vehicles for tax year 2009. Approximately 4.3 million individuals claimed $7.2 billion in Qualified Motor Vehicle Deductions.
Our reviews of the effectiveness of IRS processes to identify and prevent wrongful claims for these energy‑related credits and deductions identified erroneous claims for millions of dollars in these credits and deductions. It must be stressed that these claims could have been minimized if the IRS had taken the actions I am about to describe. Importantly, these changes would also help minimize erroneous claims for other tax credits as well.
First, the IRS must establish effective processes to verify eligibility for these credits at the time tax returns are processed. Second, it needs to design the tax forms used to claim the credits and deductions in such a way as to request key information that can be used to verify eligibility. And, third, the Service must use the data it already possesses to identify non‑qualifying claims.
In January, we reported that for paper‑filed returns with plug‑in and alternative vehicle claims, the IRS did not establish processes to record data from tax forms for the credits. This prevented the IRS from accounting for these claims, and also identifying potentially false ones. Furthermore, we identified 12,920 individuals who electronically filed their tax returns and erroneously claimed $33 million in Plug‑in Electric and Alternative Motor Vehicle Credits.
The processes used by the IRS did not ensure the plug‑in electric and alternative vehicles claimed met the requirements to receive the credit. There was information on these tax forms that the IRS could have used to identify and stop these credits at the time tax returns were processed. We recommended that the IRS develop procedures to disallow credits for vehicles with non‑qualifying years; initiate actions to recover faulty credits; and either develop a coding system to identify vehicles, or require the Vehicle identification Number on the forms used to claim these credits.
Concerning the Residential Energy Credits, we reported that the IRS could not verify whether individuals claiming these credits are entitled to the credit at the time their tax returns are processed. The form used to claim these credits does not request specific information that could be used to verify the requirements of the law.
Furthermore, using data the IRS already has, we identified 362 ineligible individuals who were allowed to wrongly claim over $400,000 in Residential Energy Credits on their tax returns. These individuals were either prisoners, or were under the age needed to enter into a contract to purchase a residence. The IRS does not have a process in place to use its data to identify these cases. We recommended that the IRS revise the form used to claim Residential Energy Credits to request specific information supporting eligibility requirements; examine the returns of the 362 individuals who appear to be ineligible to claim it; and implement processes to identify and review returns filed by prisoners or underage individuals, to verify whether they qualify for the credit.
We also identified similar issues with the Qualified Motor Vehicle Deduction. This deduction expired on December 31, 2009, and has not been extended by law.
I am pleased to report that the IRS agreed to all of our recommendations.
Mr. Chairman, we at TIGTA appreciate the opportunity to assist you in your oversight of the IRS.
[The statement of Mr. George follows:]
*Chairman Tiberi. Thank you so much, General George.
Mr. Byrd, you may proceed with your testimony.
STATEMENT OF RICHARD E. BYRD, JR., COMMISSIONER, WAGE AND INVESTMENT DIVISION, INTERNAL REVENUE SERVICE, WASHINGTON, D.C.
*Mr. Byrd. Thank you, and good morning. Chairman Tiberi, Ranking Member Neal, Chairman Boustany, and Ranking Member Lewis, my name is Richard Byrd, and I am Commissioner of the Wage and Investment Division at the Internal Revenue Service.
I appreciate the opportunity to testify before the subcommittees on the residential energy property tax credits and plug‑in electric and alternative motor vehicle tax credits, and the ongoing efforts by the IRS to ensure proper administration of the laws relating to them.
The number of tax credits affecting individuals and businesses has grown in recent years. For example, the Recovery Act contained more than 50 tax provisions, including tax credits, which cover a broad spectrum of tax relief. However, it is important to note that the tax credits being discussed today are not refundable tax credits.
The residential energy property tax credits and the plug‑in electric and alternative motor vehicle tax credits reduce, dollar for dollar, a person’s tax liability. While such credits could not reduce a person’s tax bill to less than zero, they can increase a taxpayer’s refund if he or she paid too much in estimated tax, or had too much tax withheld over the year, as many people do.
In administering tax credits, the IRS must deliver the benefits that the legislation provides in the intended time frame, while ensuring that appropriate and prudent controls and filters are in place to minimize errors and fraud. This is not an either/or proposition. We must do both well.
During 2010, the residential energy property credit and the resident energy efficient property credit provided nearly $6 billion to 6.7 million homeowners who weatherized their homes and made them more energy efficient. Both credits include multiple types of eligible expenditures with differing restrictions and unique criteria.
Over the same time period, 34,724 individual taxpayers took advantage of the plug‑in vehicle tax credits for personal and business use, for a total of $150 million, with each credit subject to different and complex eligibility requirements.
As with any new tax provision, we continually adapt our programs to improve the screening process as we gain experience with them. Over the course of administering these energy credits, a number of compliance concerns were identified. The IRS took quick action to correct these issues, and continues to make additional improvements for the future. We have put in place procedures to prevent taxpayers from receiving credits in excess of the limitations, and are revising forms to request more specific information. We have also worked with the software providers to better improve information related to these credits.
As part of our ongoing examination program, we are reviewing the energy credit claims, including returns of prisoners and under‑age taxpayers to ensure that their credit claims are proper. The IRS also continues to audit claims as we need to. The IRS continually assesses and evaluates present and emerging compliance risk across all taxpayer segments.
And as part of the IRS’s ongoing research and its 2011 examination plan, we will review a sample of residential energy credit cases in a post‑refund environment. Those that warrant examination will be selected for audit, and the results will be factored in to future examination plans.
In conclusion, tax credits such as the residential energy and plug‑in vehicle tax credits play an important role in fulfilling congressional energy policies and intent, but are inherently subject to a number of administrative challenges. As with all aspects of tax administration, the IRS must determine the proper balance of taxpayer service and enforcement to ensure that the benefit is afforded only to those taxpayers who are eligible. We are committed to that goal.
That concludes my testimony. I would be happy to take your questions.
[The statement of Mr. Byrd follows:]
*Chairman Tiberi. Eight seconds to spare. Thank you, Commissioner, for your testimony today.
I am going to now yield to Dr. Boustany and Mr. Lewis for questions.
*Chairman Boustany. Thank you, Chairman Tiberi. Gentlemen, thank you for being here today, and for your testimony. And, Mr. Byrd, it is encouraging that steps are now being taken to remedy some of these problems. And I am certainly cognizant of the fact that a lot of complexity was added to the tax code in a very quick way, which makes your job very difficult. And as we work on policy, we clearly have to understand that this growing complexity in the tax code is a problem we have to address, because it certainly creates problems from the administrative standpoint, as well.
But, you know, as we have tried to conduct aggressive oversight over the course of this year, there has been a common theme running through many of our hearings. And whether the subject has been Medicare fraud, or earned income tax credit problems, energy tax credit fraud, we often have, as a government, have approached this sort of a pay‑and‑chase strategy for improper payments. And what concerns me is if that is where we are, what are we doing on the chase side? Are we actually recouping some of this money that was improperly paid out?
*Mr. Byrd. Yes, sir. We have what we call a pre‑refund strategy, where our goal is to block the bad refund before it goes out, and we’ve been very successful there.
And then, of course, we have a variety of tools if we subsequently determine that we sent the wrong amount our ‑‑ we have what we call a post‑refund strategy, and there are a number of things that we can do. The most successful tool we have, of course, is examination. We communicate and/or meet with the taxpayer, and allow them to share with us their documentation to support their claim.
*Chairman Boustany. General George, are you satisfied that the IRS has followed the recommendations that you all have made?
*Mr. George. I am satisfied that they are committed to doing so. But have they done so completely? Not yet. I don’t disagree at all with what Mr. Byrd stated, but what he neglected to point out is that once the money is out the door, it is extraordinarily expensive and difficult to recoup it.
And so, if they could do so at the outset more effectively, they would be much more successful, in terms of recouping or stopping the improper payments of ‑‑
*Chairman Boustany. Thank you. If I’m an individual intent on defrauding the tax system with these credits, what disincentive do I have from claiming, for example, a vehicle credit on a bicycle, or something of that nature? What are the disincentives?
I would like both of you to comment on it, if you don’t mind.
*Mr. Byrd. TIGTA recommended to us that we put some controls and request additional information from the taxpayer, which we have done for this past filing season. And we found that quite helpful in enabling us to ID and block those claims that are improper.
The suggestions that they made were good suggestions, and we have implemented them. If a person claims a plug‑in car that is not in a qualifying year, then we can take that credit out of the return before we send them the rest of their refund.
*Chairman Boustany. Can you give us an indication of the kinds of resources that are required in chasing money after the fact, as opposed to working on the front end to have the proper filters and controls in place?
*Mr. Byrd. When a tax return comes in, if it comes in electronically, then it will be matched up against the filters. That is the way that we prefer the tax returns come in. If it comes in on paper, then it has to be touched by a person, which makes it more expensive and more time‑consuming.
So if we send out an erroneous refund, then normally what happens is we have to examine that tax return, which requires some correspondence, and in this case it would probably be an examination through correspondence. So it is an examiner who is communicating with the taxpayer, and then the taxpayer would send in their documents, and we would review them and make a decision.
*Chairman Boustany. In other words, it is more labor‑intensive, and ultimately more costly to the agency to have to go in after the fact.
*Mr. Byrd. Yes, sir. The least expensive way is for the taxpayer to file electronically. Then the next way would be if they file on paper. And then the most expensive, of course, is if we have to do an examination.
*Chairman Boustany. Thank you, sir. I yield back.
*Chairman Tiberi. Thank you, Doctor. Mr. Lewis is recognized for five minutes.
*Mr. Lewis. Thank you very much, Chairman Tiberi. Now, Commissioner Byrd, in the report on the administration of vehicle credits, TIGTA made eight recommendations to improve compliance and the IRS accepted all of them. Now, how long does it generally take to implement recommendations received from TIGTA?
*Mr. Byrd. Well, if it is a recommendation that we change the way we electronically review or filter the tax returns, it could take us months and months, just because of the workload and the complexity of our computer systems. There are often things that TIGTA recommend that we implement in a short time period.
*Mr. Lewis. Now, one recommendation was to establish a system to track credits claimed on paper‑filed tax returns. Why do you need to establish a separate system for paper returns? Is there a reason that the IRS does not convert all paper returns to the electronic version during processing?
*Mr. Byrd. Well, we would like to be able to convert all the paper returns to electronic returns, but that would cost a lot to make that conversion. When you have to track claims, or track information from the tax return, you have to transcribe the information. You have a person who has to transcribe the information from the tax return.
So, again, it adds cost. It adds time to the processing of that tax return.
*Mr. Lewis. Do you have some idea how much the cost would be?
*Mr. Byrd. Right now, it costs about $.17 to process an electronic return. And it costs about $3.66 to process a paper return. And since we received about 124 million electronic returns, you can see the savings that we have if we can get the taxpayers to come in electronically.
*Mr. Lewis. Commissioner Byrd, in your written testimony you stated that hard‑to‑detect fraud presents a challenge to your compliance efforts for energy tax credits.
Now, the Republican budget proposal for the IRS, as passed by the House Appropriation Committee would cut $600 million from the agency. The Appropriation Committee report notes that the cut will have a significant impact on the ability of the IRS to find tax cheats. The report states that the agency will be forced to furlough between 4,100 and 5,000 employees. Is this estimate correct?
*Mr. Byrd. Sir, we, of course, don’t have our funding yet for this coming year. But we can imagine, with that type of dollar cut, we are going to have to dramatically reduce our staffing in a number of places. So that would be information technology, that would be how we serve the taxpayers, how we answer the phones, how we look for fraud, how we examine the tax returns.
We cannot absorb that type of cut without it having an impact on the service we provide taxpayers, and the enforcement of the IRS code.
*Mr. Lewis. So you are suggesting that these employees mainly would be enforcement agents? Are you stating this?
*Mr. Byrd. Well, sir, what we need to have is exactly what it is that our funding will be for this year. But that is why we are saying that we imagine that it would be across the board that we would have to take some action.
Enforcement people would be included in those cuts that we would have to take. And enforcement people are the people who examine the tax returns.
*Mr. Lewis. The enforcement agents are the people that help the IRS detect fraud, right?
*Mr. Byrd. Yes, sir.
*Mr. Lewis. Okay. So the Republican budget would hurt enforcement compliance efforts and the administration of energy and other tax credits
So, Mr. Chairman, without objection, I would like to enter to the record an excerpt from the House committee report on IRS funding.
*Chairman Tiberi. Without objection, so moved.
**INFORMATION NOT PROVIDED**
*Mr. Lewis. Mr. Inspector General, we appreciate your recommendation to improve the administration of the energy‑related tax credit. In your written testimony, you stated that the IRS has little resources to examine claims after the credits have been paid. If the IRS had more resources, would it be better able to perform its duties?
*Mr. George. There is no question that ‑‑
*Chairman Tiberi. The gentleman’s time has expired, but you may answer ‑‑
*Mr. George. Thank you, Mr. Chairman.
*Chairman Tiberi. ‑‑ the question. Thank you.
*Mr. George. Yes. I believe that it is the case. If they had additional resources, they would be able to do more. It is a zero sum game, as Mr. Byrd noted. If they have to take money away from compliance to support customer service or vice versa, it ultimately impacts the taxpayer, in terms of whether or not they are having a more friendly interaction with the IRS ‑‑ that is, the ability to walk into a taxpayer assistance center, or to call the 800 number and get a quick response, as opposed to having letters sent to them or, even a worse case, people visit them in their homes or businesses.
*Mr. Lewis. Thank you, sir. Thank you, Mr. Chairman.
*Chairman Tiberi. Thank you. I will now recognize the ranking member from Massachusetts, Mr. Neal.
*Mr. Neal. Thank you, Mr. Chairman. To our witnesses, actually a threefold question.
First, I am pleased with the efforts that the IRS has made, based upon bank secrecy. And I think the effort that’s been made in Switzerland is a good example of what can be done when enforcement techniques that utilize the computer are applied. That is a good story. I can’t imagine that there is anybody in America who would object to the efforts that the IRS has made in trying to sift through these offshore accounts.
But the second part of the question ‑‑ and it is a follow‑up, actually, to what Mr. Lewis said ‑‑ some of the errors that you have identified today, some are, I assume, mistakes that have been made by the filer. And, as Mr. Lewis pointed out, I think correctly, the proposed cuts in the agency are going to make it more difficult for you to assist an honest mistake that has been made by the filer.
And with respect to the audits that you have cited, there are taxpayers who erroneously claim tax credits, but they did it by mistake. And if there is no fraudulent intent, if some of these errors indeed were mistakes, do you have suggestions on how we might help the taxpayer, the citizen, better comply with these rules?
And in addition, if you could, speak to another issue that tends to draw attention here, and that is some of the prisoners across the country who erroneously received credits, and what the IRS can do in these arenas to make sure that this doesn’t happen again.
*Mr. Byrd. Yes. Thank you, sir, for that question. Our experience has been that taxpayers, normally make mistakes, as opposed to fraud. That is primarily around the point of the complexity of the law.
And for a ‑‑ for those of us who like the tax code, and read it, and enjoy it ‑‑ the majority of Americans don’t ‑‑
*Mr. Neal. Who are they?
*Mr. Byrd. Me. So just those of us at the IRS. But I think your average taxpayer finds, often times, the law is very complex. And I think the software folks have done a great job to help.
In answer to your question, I think simplification of the tax code would be key to help taxpayers not make the mistakes that they make to date. The majority of taxpayers make mistakes, and then I think there is a small part that is involved with fraud.
As it concerns the prisoners, we have stepped it up. We have blocked an increase of 250 percent of the fraudulent returns filed by prisoners. We actually have a strategy where we have dramatically improved the data that we receive from the prisons. A key piece when a tax return comes in is we match it up against this information we get from the prisons, so that we could see who is in jail. We have refined that criteria so it is much more improved.
We have started to work with each prison to allow us to share information with them. When a prisoner files a fraudulent return, we can now share information with the prison, so that they can take action against that prisoner. We have also worked with all of them so that if a check does go to a prison, that we have streamlined and improved the processes for the prison officials to return those checks to us.
And, of course, we would like to encourage you all to strengthen the legislation that is out there in regards to how we can share, and what we can share with the prison officials about these fraudulent tax returns.
*Mr. Neal. That is consistent with Mr. Lewis’s testimony. Mr. George?
*Mr. George. Yes, Mr. Neal. I have testified on this issue a number of times before this committee, as long ago as five years. And while Mr. Byrd is accurate that they have these procedures and policies in place, we have found that they have not effectively implemented them.
There is no question that you have a defined population of people incarcerated. And after my initial testimony, Congress enacted legislation that helped facilitate this exchange of information. But we recently reported that they did not do so effectively, and they were still in the process of doing so many, many years later. So, we are troubled by the delay that the IRS took in terms of implementing this, and they still have a ways to go in that regard.
There is no question that if people are given the opportunity to readily file their taxes in an understandable way ‑‑ going back to what Mr. Byrd said ‑‑ that is something quite appropriate. But we have found that, in many instances, the IRS has made it cumbersome, both in terms of the language within the tax form and the accompanying materials, among other factors.
*Mr. Neal. Thank the witnesses.
*Chairman Tiberi. Thank you, Mr. Neal. Ms. Jenkins is recognized for five minutes.
*Ms. Jenkins. Thank you, Mr. Chair, thank you for holding this hearing. Thank you, Gentlemen, for joining us.
In recent decades, Congress has increasingly tasked the IRS with administering programs that aren’t focused on revenue collection. For example, through the earned income tax credit, the IRS administers one of the nation’s largest welfare programs. The Taxpayer Advocate has warned that the IRS’s increasingly dual mission of revenue collector and program administer diverts IRS resources away from the agency’s core revenue collection function, and can diminish taxpayer service.
So, for the both of you, as Congress through the years has sought to implement more and more public policy through the tax code, could you both just describe to us what effects this has had on tax administration?
*Mr. George. Congresswoman, you have hit an important point here. The Earned Income Tax Credit still, as estimated by the IRS, has improper payments in the $10 billion to $12 billion a year range. The Additional Child Tax Credit, it is in the billions, in terms of improper payments. The First-Time Homebuyers Credit we found millions, hundreds of millions of dollars which were improperly paid.
We just recently completed a review on the implementation of the Affordable Care Act. And while we will conclude that the IRS is being effective in planning on how to implement portions of that legislation, it is taking away from their traditional role of collecting revenue and assisting taxpayers in paying their taxes.
So, unless the IRS is able to more effectively allocate its resources, it is going to make its primary mission ‑‑ that is, again, collecting revenue ‑‑ much more difficult.
*Ms. Jenkins. Thank you. Commissioner?
*Mr. Byrd. Yes. I have been here a long time, and I don’t know that I would ever say we have had sufficient resources to do our job, because I understand that there are competing priorities that our country has. But I wanted to assure you that when Congress decides to write a law, and they send it to us to implement, that we are trying to do it in the most cost‑efficient way possible through innovation, through the use of technology, through the use of all the enforcement tools that we have.
We believe that the majority of our taxpayers want to and do file an accurate tax return. When the IG discusses these or shares these numbers, one could get the impression that our taxpayers are not honest, and I don’t believe that’s true. I believe that you have an area of fraud that we have to always deal with, and we had it before we had the credits, and we have it today. But what I want to assure you is that we, in the IRS, are going to use the resources that you all provide as efficiently as possible to deal with the priorities that you all send our way.
*Ms. Jenkins. Okay, thank you. I would yield back.
*Chairman Tiberi. Thank you. Mr. Paulsen is recognized for five minutes.
*Mr. Paulsen. Thank you, Mr. Chairman. Also, thanks for joining us here as a part of this testimony today.
Let me ask this question, because we have talked a little bit about some erroneous payments and duplicative credits that get paid out as a part of these credits.
I am just curious, because it seems like every time Congress creates one of these new energy credits or this green energy or other areas, we end up creating new tax shelters and issues like that that have applied to synthetic fuels and biodiesel and alternative fuels, et cetera. And, you know, the abuses end up costing taxpayers millions of dollars, billions of dollars, and the fraud and the abuse is a part of it.
What is it about these credits, in general, that make them so susceptible to this kind of fraud, overall? Mr. Byrd?
*Mr. Byrd. Well, I am not sure, sir, that we are here today to talk about credits. You know, our examination program is designed to look at a wide range of issues and concerns that we see as taxpayers file their returns. So our experience has been that in all parts of the code, that taxpayers sometimes take liberties with the rules.
So, sir, I am not sure that I would say that because it is a credit it is susceptible to more fraud.
*Mr. Paulsen. Mr. George?
*Mr. George. Yes. I would just say, sir, that they do not utilize the information effectively that they have.
I am not going to necessarily argue with Mr. Byrd about whether or not there are more instances of fraud or whatever the case may be there. But there is no question that if the IRS were to use the information that the taxpayer provides and, more importantly, gain access to third‑party information, which ‑‑ again, at various settings I cite this information, sir, and I beg your indulgence here.
The IRS itself estimates that individuals whose wages are subject to withholding report 99 percent of their wages for tax purposes. Self‑employed individuals who operate non‑farm businesses are estimated to report only 68 percent of their income for tax purposes. And the shocking number is self‑employed individuals operating businesses on a cash basis report only 19 percent of their income.
So, the bottom line is if the IRS were to require additional information from third parties, by their own estimates, they would gain much more revenue. If they used the information that was supplied by the taxpayers on their tax forms, either electronically or in paper form, they would also have more information that they could use.
So, again, it’s a question of how the IRS allocates its resources to determine whether or not a taxpayer is complying with their tax obligation.
*Mr. Paulsen. Well, and Mr. Chairman, this is an interesting point, because we have had hearings, actually, in the human resources subcommittee and talked about other government programs that are used to provide benefits to certain folks that ‑‑ of modest means ‑‑ that use government programs, and there is not an access, or there is more of an increased need to use an access to third‑party information to weed out some of the fraud and abuse that is out there. That is a good point.
Now, someone, I think, had mentioned earlier ‑‑ and I cannot remember who testified ‑‑ in terms of the cost filing electronically versus mail‑in. And it’s like 124 million that use electronic. What can be done to encourage more use of electronic filing? Because ultimately, electronic information and using third‑party matches, et cetera, is going to help weed out some of these issues, and save taxpayers money. What can be done to promote that?
*Mr. Byrd. First, I did want to assure you that we are expanding our systems to use more third‑party information, merchant cards, those types of things. I think part of the challenge around third‑party information is that sometimes it is not completely accurate. And so, you don’t want to deny a taxpayer a refund based on information that might not be complete.
In specific response to your question, sir, we have seen a dramatic increase in the number of returns that have been filed electronically. We have got the eFile mandate, where preparers that prepare more than 10 returns have to send them in electronically. That is being phased in through last year and this year. We are seeing a dramatic increase in the number of taxpayers who are going to file electronically.
The other thing that has happened is the software providers, for the most part, no longer charge taxpayers to electronically file their return. Those things together have allowed us to see a large increase.
*Mr. Paulsen. Thank you, Mr. Chairman. I yield back.
*Chairman Tiberi. Thank you. Mr. Marchant is recognized for five minutes.
*Mr. Marchant. Thank you, Mr. Chairman. I would like to focus for just a moment on the ‑‑ it looks like it is 100,000 individuals who claimed energy credits that did not own a home. Was the law, as it was passed, did it require that an individual own a home to seek the credit?
*Mr. George. Well, they needed to own it at the time of ‑‑ yes. The short answer is yes.
*Mr. Byrd. It is their primary. Yes, sir.
*Mr. George. Yes.
*Mr. Marchant. So it couldn’t be their second home, it couldn’t be their vacation home. It had to be their primary home.
*Mr. George. Yes.
*Mr. Marchant. So, a very common‑sense thing. But 100,000 people felt like they could take the credit without very clearly meeting the criteria of the law.
What percentage of those that claimed that credit does the 100,000 represent?
*Mr. Byrd. I actually don’t know, sir. I would have to get back to you on that.
*Mr. Marchant. Do you think the 100,000 would represent 10 percent of those that claimed that credit?
*Mr. Byrd. You know, I did not bring the numbers of taxpayers that claimed that particular credit.
*Mr. Marchant. I would appreciate it if we could find out what percentage of those that claimed clearly made a fraudulent claim, right up front.
*Mr. Byrd. It is important to note, sir, that I think when TIGTA made that recommendation it was based on information from a third party. And so, part of the struggle for us is around trying to have information that we can rely on to make sure that it is accurate.
As I said before, we don’t want to deny somebody a credit. We don’t want to deny them a credit without us being sure.
*Mr. Marchant. But if ‑‑
*Mr. Byrd. We have learned in other places ‑‑ the adoption credit, the first‑time home‑buyer’s credit ‑‑ that what you see on the face of the return appears that it is fraudulent. But when you communicate, and ask that taxpayer for documentation or information, they are able to provide it.
*Mr. George. But that, Mr. Marchant, is part of the problem. The IRS, as Mr. Byrd noted, does not have the ability to give the type of information that you just sought. And it is not necessarily their fault.
They are in the process now, with a National Performance Review ‑‑ I believe you call it the NPR ‑‑ and they are in the process now of helping to determine what the ultimate tax gap is in various areas. And once that is completed, that will provide them additional information so that they are in a position to respond precisely to your question.
*Mr. Marchant. Okay. Thank you, Mr. Chairman. I yield back.
*Chairman Tiberi. Thank you. The gentleman from Washington State, Mr. McDermott, is recognized for five minutes.
*Mr. McDermott. Thank you, Mr. Chairman. Commissioner Byrd, I understand that the taxpayer service is part of the IRS strategy for tax compliance. The Republican budget would cut over $105 million from taxpayer service. Now, we understand this cut would result in fewer calls being answered and fewer taxpayers receiving in‑person service. I mean that seems like that would be the result, if you have less people.
A statement of Administration policy was issued in response to the budget. The policy states that this level of funding provided would seriously degrade the quality of services to taxpayers, to the extent that only one out of every two taxpayers would be able to reach the IRS customer service representative.
Do IRS customer service representatives answer questions about energy tax credits?
*Mr. Byrd. Yes, sir. And so this year we are on track to take 32 million calls from taxpayers. And we are going to see about six million taxpayers come into our taxpayer assistance centers. And so there we provide a wide array of services and information, including answering questions about tax concerns. But then we also enable the taxpayers to pay us, to set up installment agreements, and, in essence, to deal with compliance things on the phone or in person.
*Mr. McDermott. So, if I could restate what you said, the Republican budget would hurt taxpayer service and administration of energy and other tax credits. That is correct?
*Mr. Byrd. If our funding is not the same, then we would not be able to serve the numbers of taxpayers that I just described, sir.
*Mr. McDermott. So, without objection, I would like to submit into the record the statement of the administration of policy ‑‑ of H.R. 2434. And I ask the chairman to put it into the record.
*Chairman Tiberi. Without objection.
**INFORMATION NOT PROVIDED**
*Mr. McDermott. I understand, Mr. Byrd, that the IRS does not have a dedicated funding source to invest in its program integrated effort ‑‑ integrity efforts. I understand that funding for enforcement and compliance must come out of the current IRS budget. Is that correct?
*Mr. Byrd. Yes, sir.
*Mr. McDermott. So, the Republican budget would cut $600 million of the IRS. This would hurt the program’s integrity efforts. Right?
*Mr. Byrd. Yes, because, you know, if we have less people and less funds to examine, filter, follow up with the returns, that means we can get ‑‑ we will be able to accomplish less work, because we have less employees ‑‑ fewer employees.
*Mr. McDermott. As you know, the President set forth a plan that would provide dedicated funding for the IRS for program integrity efforts. The plan states that “tax enforcement and compliance activities are critical to the fairness and integrity of the U.S. tax system, and also generate a return on investment for taxpayers of roughly $7 for every $1 invested.” You are aware of that, is that correct?
*Mr. Byrd. Yes, sir.
*Mr. McDermott. I would like to enter that into the record for the future record of the committee, and I yield back the balance of my time.
*Chairman Tiberi. Thank you. Mr. Berg is recognized for five minutes.
*Mr. Berg. Thank you, Mr. Chairman. I guess my first question goes back to the residential energy tax credit. What is the total number of people that received or made a claim?
*Mr. Byrd. I am sorry, sir, I did not bring those stats, but I will be glad to get those back to you.
*Mr. Berg. Okay. Mr. George?
*Mr. George. Yes. Well, for tax year 2009, there were 6.8 million claims equaling $5.8 billion.
*Mr. Berg. Okay. And in the earlier testimony it was mentioned there is about 100,000 of those that you identified or thought didn’t own a home. That correct?
*Mr. George. Correct.
*Mr. Berg. Mr. Byrd, in the testimony you kind of say the IRS has adopted programs to kind of improve this process and really keep up with compliance issues. But as has been reported, obviously it is kind of ineffective at that.
And my question is ‑‑ in part, because of maybe a lax process ‑‑ I guess my question is, what is being done, really, to improve the administration of these tax credits right now, specifically?
*Mr. Byrd. So, as you probably saw in the TIGTA report, they made a number of recommendations to us. For example, on the plug‑in car, they suggested that we ask the taxpayer to put the VIN on the form. We have put things in place so that we will manually check to make sure that the qualifying year of the car is correct.
So, what I am sharing with you, sir, is that those things that TIGTA suggested that we put in place, we have. And we feel confident that those things will help us to reduce the number of fraudulent claims.
*Mr. Berg. Mr. Chairman, I wonder if it is possible if we ‑‑ if I could ask that again we get those recommendations.
I understand you said that you have agreed with all of those recommendations, but if you could, again, just have a short summary of, “Here is the recommendations,” and then you say, “We agree with these recommendations,” and when the timetable is to fully implement those recommendations, would that be possible for you to share that with the committee?
*Mr. Byrd. Yes, sir, because what we do, in terms of how we track the recommendations and our implementation, we have a process in place. So that will be easy for me to provide you.
*Mr. Berg. Okay, thank you. I yield back.
*Chairman Tiberi. Thank you. Apparently that is all the questions that we have of this panel. We do appreciate both of you coming forward, giving your input, General George, on how we can improve efficiency and, Mr. Byrd, Commissioner Byrd, thank you for your thoughts about how we can simplify the tax code and make your life easier. We do appreciate both of your testimony today. Thank you for taking the time out. That concludes our first panel
We are going to now move to the second panel of testimony, and we are going to have a bit of a change to the second panel.
Without objection, I would like to move that we add Mr. Lindsey from the Lindsey Group to the second panel. There was some miscommunication, and Mr. Lindsey has a conflict, and will not be able to stay for the third panel. So, without objection, Mr. Lindsey will be added to the second panel.
Mr. Lindsey, you will be added at the end of the second panel ‑‑ so on the far left, or my far right ‑‑ and you will be the last person to testify on the second panel.
So, as the second panel gets seated, I would just like to welcome all of them. And I am going to ask Ranking Member Neal in a moment ‑‑ no, you have got the third panel, right?
*Mr. Neal. Yes.
*Chairman Tiberi. Okay. I will go ahead and introduce our ‑‑ generally introduce our panelists, and welcome them to the second panel.
Dr. Donald Marron, director of tax policy center, The Urban Institute; Mr. Kevin Book, managing director research, Clearview Energy Partners, LLC; Mr. Neil Auerbach, founder and managing partner of Hudson Clean Energy Partners, L.P.; Mr. Will Coleman, partner, Mohr Davidow Ventures; Mr. Greeff, political director, the Clean Economy Network; and, as I said, from the third panel who will now be part of the second panel, Mr. Lawrence B. Lindsey ‑‑ Dr. Lawrence B. Lindsey, president, chief executive officer of The Lindsey Group.
And with that, thank you all for coming, taking time out of your busy schedules to be here with us today. Dr. Marron, you are recognized for five minutes.
STATEMENT OF DONALD B. MARRON, DIRECTOR, TAX POLICY CENTER, THE URBAN INSTITUTE, WASHINGTON, D.C.
*Mr. Marron. Great, thank you very much. Chairman Tiberi, Chairman Boustany, Ranking Member Neal, Ranking Member Lewis, members of the subcommittees, thank you for inviting me to appear today to discuss energy policy and tax reform.
As you know, our tax system is desperately in need of reform. It is needlessly complex, economically harmful, and often unfair. Because of a plethora of temporary tax cuts, it is also increasingly unpredictable. We can and should do better.
The most promising path to reform is to re‑examine the many tax preferences in our code. For decades, lawmakers have used the tax system not only to raise revenues to pay for government activities, but also to pursue a broad range of social and economic policies. Those policies touch many aspects of life, including health insurance, home ownership, retirement saving, and the topic of today’s hearing, energy production and use.
Those preferences often support important policy goals, but they have a down side. They narrow the tax base, reduce revenues, distort economic activity, complicate the tax system, force tax rates to be higher than they otherwise would be, and are often unfair. Those concerns have prompted policy‑makers and analysts across the political spectrum ‑‑ including, most notably, the Bowles‑Simpson Commission ‑‑ to recommend that tax preferences be cut back. The resulting revenue could then be used to lower tax rates, reduce future deficits, or some combination of the two.
In considering such proposals, law‑makers should consider how tax reform, fiscal concerns, and energy policy interact. Six factors are particularly important.
First, as I just mentioned, our tax system needs a fundamental overhaul. Every tax provision, including those related to energy, deserves close scrutiny to determine whether its benefits exceed its cost. Such a review will reveal that some tax preferences do make sense, but many others should be reduced, redesigned, or eliminated.
Second, the code includes numerous energy tax preferences. The Treasury Department, for example, recently identified 25 broad categories of energy preferences worth about $16 billion in 2011. These include incentives for renewable energy sources, traditional fossil fuel sources, and energy efficiency. In addition, energy companies are also eligible for several tax preferences that are available more broadly, such as the domestic production credit.
Third, tax subsidies are an imperfect way of addressing concerns about energy production and use. Such subsidies do encourage greater use of targeted energy resources, but, as I discuss in greater detail in my written testimony, they do so in an economically inefficient manner.
Subsidies require, for example, that the government play a substantial role in picking winners and losers among energy technologies. The associated revenue losses also require higher taxes or larger deficits. That doesn’t necessarily mean that they are bad policy, but it does raise the hurdle for them to satisfy in order to be counted as good policy.
Fourth, a key political challenge for reform is that energy tax subsidies are often viewed as tax cuts. It makes more sense, however, to view them as spending that is run through the tax code. Reducing such subsidies would make the government smaller, even though tax revenues, as conventionally measured, would increase. Similarly, introducing new tax preferences would expand the scope of government, even though technically, in budget accounting, they would be scored as reducing future revenue.
Fifth, tax subsidies are not created equal. Some are more efficient than others. In particular, production incentives tend to be a more efficient way of accomplishing energy policy goals than are investment incentives.
Finally, well‑designed taxes can typically address the negative effects of energy use more effectively and at lower cost than can tax subsidies. I understand that higher gasoline taxes or a new carbon tax are not popular ideas in many circles, but please bear with me. As I explain in greater length in my written testimony, well‑designed energy taxes are a much more pro‑market way of addressing concerns about the production and use of energy. Taxes can take full advantage of all market forces on the demand side and the supply side, and in so doing can accomplish many policy goals at least cost and with minimal government intervention in the economy.
Subsidies, in contrast, make much less use of market forces, and inevitably require the government to pick winners and losers. Energy taxes also generate revenue that law‑makers can use to cut other taxes or to reduce deficits.
Thank you. I look forward to your questions.
[The statement of Mr. Marron follows:]
*Chairman Tiberi. Thank you.
Mr. Book is recognized for five minutes.
STATEMENT OF KEVIN BOOK, MANAGING DIRECTOR, RESEARCH, CLEARVIEW ENERGY PARTNERS, LLC, WASHINGTON, D.C.
*Mr. Book. Good morning, Chairman Tiberi, Chairman Boustany, Ranking Member Neal, Ranking Member Lewis, and distinguished committee members. My name is Kevin Book, and I head the research team at Clearview Energy Partners. Thank you for inviting me to contribute to your discussion today regarding energy tax policy.
Economic weakness has compressed energy demand. Since the employment trough of the Great Recession, the nation has consumed only about one‑third as much energy per job recovered as it did during the 2001/2002 recovery. That would be good news if efficiency explained the change. But data show, for example, that we are driving older cars and driving them less, rather than purchasing new, higher‑efficiency vehicles.
Because demand can move faster than supply, stable energy production incentives are important. Stable policies may not encourage new supply side investments when market conditions do not warrant it, but inconstant policies may discourage supply side investment when it is needed.
So, what works best? And how do you know? Investors judge investments against benchmarks. Similar analysis could guide energy policy, too. Evaluating incentive costs per million British thermal units measures how many bucks the U.S. Government directs, simply put, at the energy bang the nation receives. The note published by the committee staff in preparation of this hearing addresses this calculation.
Between 2006 and 2010, my analysis suggests that incentive costs for renewable sources were considerably higher than conventional sources. For green power, incentive costs averaged about $6 per million Btu. Biofuels, about $5.50. Conventional power, about $.19. Coal production, excluding programmatic spending, about $.07. And a broadly inclusive rack‑up of oil, natural gas, and refined products incentives, including some line items that are generally regarded as ordinary tax treatment, averaged about $.26 per million Btu.
Implied abatement costs quantify the emissions reduction benefits of federal spending on lower‑emitting fuels, even if spending wasn’t aimed at reducing greenhouse gases. Two sources came in at or below the current price of emissions allowances trading in Europe: wind, at about $4 to $20 per metric ton, depending on your assumptions; ethanol, at about $16, if you count only the VEETC; solar, at about $62 to $200 per metric ton, was above the current trading market in Europe; cash for clunkers was about $263 per metric ton. And if the Nat Gas Act were to cost $5 billion over 5 years for 140,000 heavy haulers, the resulting gas emissions reductions, greenhouse gas emissions reductions, would be about $120 per metric ton.
Displacement costs quantify the extent to which federal energy incentives reduce our reliance on imported petroleum. As a benchmark, the strategic petroleum reserve through the end of last year had a displacement cost of about $67 per barrel, or $11.50 per million Btu. The real dollar value of ethanol capacity historically subsidized by the VEETC through its scheduled expiration at the end of this year implies about $148 per barrel or $42 per million Btu. But evaluated over a 15‑year finance life, that’s about $10 per barrel, and $3 per million Btu. Again, assumptions are important.
The displacement cost from nat gas, based on those prior assumptions, the Nat Gas Act, would be $118 per barrel, or about $20 per million Btu if you looked at it as a one‑time deal. But amortized over 5 years, it would be about $23.50 per barrel, or about $4 per million Btu.
A couple of caveats before I finish up. First, comparing alternative fuels to the strategic reserve is not an apples‑to‑apples comparison. The strategic reserve is surge capacity. Alternative transportation fuels replace petroleum imports, and they are already in use.
Second, none of these metrics captures the total cost of delivered energy, just the part the U.S. Government covers. Consumers and producers pay the rest. Trying to change their decisions in defiance of economic reality may prove both difficult and expensive.
There are also metrics you can apply to look at the efficiency of financial incentives. My testimony provides an example of something I call return on tax to describe simplified wind farm financing. That example shows that production tax credits are the least efficient, in terms of delivering both internal rate of return and a return on each taxpayer dollar, in terms of lower generation cost. Incentives like investment tax credits and grants become more efficient in both regards, but the best balance turns out to actually be loan guarantees. Now, loan guarantees, obviously, will not be more efficient without adequate due diligence.
In conclusion, in thinking of all of these incentives, they should be thought of, probably, as a portfolio. It allows one to balance innovation with environmental and security benefits. Balancing moonshot technologies with lower risk reward profiles may preserve financial stability. And it may be worth revisiting whether the current title XVII appropriations‑backed solicitation‑driven debt financing program has the autonomy to structure an appropriately balanced portfolio.
One final point. Tax policy is not always the fastest energy policy tool. But the high cost and long life of energy investments means that fast can sometimes translate to expensive. Prescriptive environmental and fuel standards do delivery rapid results. But non‑economic shut‑downs can lead to wealth destruction and job losses.
This concludes my testimony; I will look forward to any questions.
[The statement of Mr. Book follows:]
*Chairman Tiberi. Thank you, Mr. Book.
Mr. Auerbach, you are recognized for five minutes.
STATEMENT OF NEIL Z. AUERBACH, FOUNDER AND MANAGING PARTNER, HUDSON CLEAN ENERGY PARTNERS, L.P., TEANECK, NJ
*Mr. Auerbach. Chairmen Tiberi and Boustany, Ranking Members Neal and Lewis, and the rest of the subcommittee, thank you for the opportunity to testify today. My name is Neil Auerbach, and I am the founder and co‑managing partner of Hudson Clean Energy Partners, a leading private equity firm exclusively dedicated to investing in the clean energy sector, globally.
Although the firm is only four years old, I have been an active investor in this sector since 2002, and have been fortunate to have generated substantial investment gains in this sector, investing in this sector over the course of my career as an investor. And, therefore, I am offering you an investment perspective on how government energy policy influences investment activity.
I also happen to be a conservative, and I believe in limited government, because experience tells me that the private sector does most things better than government. When government does act, it needs to search for least cost, highest impact ways to achieve its goals.
This committee has been charged with the task of examining energy tax incentives, and I applaud that effort. My written testimony contains a lengthy review and analysis of energy tax incentives, and includes a strong endorsement of the use of reverse auctions to support renewable energy deployment such as that found in H.R. 909.
To explain why I draw that conclusion, I want to articulate several core principles underlying my thinking. First of all, I think that three policy drivers are behind smart energy policy: supporting economic growth, fostering energy security, and also fostering environmental security. I support portfolio diversity. The approach is very instructive to getting us there. When markets function properly, we can allocate capital rationally in the private markets.
Another aspect of my view of energy policy reflects that energy is a commodity, not a product. It is the backbone of our economy, and it needs to be there when we need it, and it needs to be as cheap as possible.
Scale is everything in driving down cost. Consumers generally don’t drive innovation in the energy sector. During the 20th century we scaled successfully fossil fuels first. They were expensive at first, and only with scale do they get cheaper. Renewable energy scaled later in time, and government support has been essential in helping renewables overcome a late start.
Tax credits have been very helpful incentivizing investment and production of energy from renewables, and they played a vital role in moving capital into the sector. And, therefore, have contributed to dramatic reductions in the cost of these power sources. In the two slides that I show on the screen, I show just how impactful this scale‑up of renewable energy has been in driving down the cost, and in this slide show our forecast, proprietary forecast, of continuing dramatic reductions in the cost of renewables.
But I am here today to suggest that it is time to re‑examine the way the Federal Government supports clean energy investment. Specifically, I support adoption of a very different approach to federal support of our sector, and it is the use of reverse auction mechanisms, such as that advocated by Congressman Nunes and over 70 congressmen in H.R. 909. The reverse auction principle is simply a market‑making technique where buyers invite sellers to transact at the lowest possible price. It encourages competition among sellers.
Now, H.R. 909 has 3 important aspects that merit attention. First of all, the market sets the price for government support payments, not a government‑mandated view of what that price should be. The mechanism ultimately weans the industry off support payments all together over the course of time.
Number two, it draws revenue from expanded access to domestic energy such as oil and gas leases to support the scale‑up of new energy resources.
And then, third, it uses cash as a currency for providing support to industry, rather than a tax credit which, from experience, is way too complex for most renewable energy developers to access without incurring enormous friction costs. My testimony explains that this friction cost can be as high as $.30 to $.40 for every tax credit dollar expended.
And for that reason, I am also an advocate on fiscal efficiency grounds of extending the 1603 cash grant until the more modern reverse auction system can be implemented. Because what we want to do is have $1 of taxpayer money buying $1 of renewable energy development, rather than only $.60 to $.70 with the friction‑laden tax credit system.
In conclusion, I believe that it is time to phase out the tax code and phase in more efficient support mechanisms for renewable energy, and I encourage this committee to signal that the ‑‑ to the industry that it is serious about energy tax reform, and finds merit in H.R. 909 as a better way to support renewable energy in the future. Thank you.
[The statement of Mr. Auerbach follows:]
*Chairman Tiberi. Thank you, sir.
Mr. Coleman, you are recognized for five minutes.
STATEMENT OF WILL COLEMAN, PARTNER, MOHR DAVIDOW VENTURES, MENLO PARK, CALIFORNIA
*Mr. Coleman. Thank you, Mr. Chairman and distinguished members of the committee. I appreciate the opportunity to testify here today. My name is Will Coleman, I am a partner at the venture capital firm Mohr Davidow Ventures. Since 1983 we have been investing in early stage technology, and we were one of the first mainline funds to move into the energy space. We have seen firsthand the challenges of building new companies in energy, and are quite aware of how public policy impacts these markets and investing decisions.
As venture investors, we invest in innovation. Energy represents one of the largest opportunities of our time, but the market conditions here in the U.S. are difficult to penetrate, and our policies still perpetuate the status quo. I am here to suggest that there is an opportunity to reform our energy tax policies, and to focus on innovation in a way that activates the private market and fosters real growth.
Globally we are undergoing a transition to the next generation of energy technologies. Our ability to lead in that transition is essential to our ongoing economic competitiveness. In prior energy transitions, the government has always played an active role. In fact, the Federal Government spent 5 times as much per year supporting the early growth of oil, and 10 times as much supporting nuclear as we have renewables. Even today, layers of tax credits are woven into the investment and operating decisions of the energy industry, and the vast majority are focused on sustaining incumbent technologies.
My point is not to question the appropriateness of these credits. But I am questioning whether the current approach is conducive to growth. According to the Department of Commerce, we owe three‑quarters of our growth since World War II to technology innovation. But in energy, the top five oil companies spend almost nothing on R&D. The challenge we see to investing in new energy technologies has not been a lack of technology solutions or the underlying economics. It has been overcoming the market resistance to adoption of new technology and investment in innovation.
The current tax approach compounds the problem in two ways. First, it biases investment decisions towards tax advantage primary extraction, rather than the kind of innovation that can create a step change in cost and performance over time. And second, it makes it more difficult for new entrants to compete.
Our premise in our requirement as investors has always been that we invest in technologies and companies that, regardless of political regulation or subsidy, will be able to stand on their own two feet and compete on a level playing field within the life span of our investment. The problem in energy is that we don’t have a level playing field, and we don’t have a tax policy that encourages continuous innovation.
Today’s technology‑specific approach forces government to pick winners and losers. The semi‑annual debate over whether certain credits are still needed causes uncertainty in the market, and it misses the fact that each sector includes a range of companies at very different stages of development, scale, and cost reduction.
We need a new approach. It needs to be simple, transparent, technology‑neutral, accessible to large and small companies, enduring, and fundamentally focused on stimulating innovation and growth. I would like to suggest that this committee considers an approach that would create a simple, volume‑based production tax incentive designed to support technologies as they scale, and roll off as they hit maturity.
In the same way that an infant needs more support than a teenager, innovative technologies require more support than mature technologies. At some point, established technologies must be able to compete on their merits. A credit would be specific to individual companies, but available across a broad array of technologies.
For example, I know of American solar companies that have very reasonable paths to produce modules for under $.50 a watt. This would be well below the projected cost of Chinese silicon manufacturers who are at $1 a watt today. However, these companies are still in early stages of production, and their costs are over $1.30 a watt per day, which is not competitive. They will need to ramp to 250 megawatts before they drop below a dollar, and 750 megawatts in order to hit $.50. These technologies could be highly profitable, but they need to get to scale. Once it is scaled, their incentives could roll off.
This is a common story. While different technology categories each have different measures for maturity, a volume‑based approach would be based on generalizable metrics such as megawatts generated, gallons produced, or units sold. Eligibility criteria could be defined by whether a solution servers agreed‑upon policy objectives. This approach would provide transparency and certainty to investors, and draw investment to those technologies that can ultimately compete without government support.
A shift in tax policy to such a structure would, one, end the current practice of picking long‑term technology winners; two, refocus federal support on early technology deployment, where it is needed most; three, eliminating the sun‑setting challenges associated with current policy; and four, encourage private investment and innovation, which is critical to new economic growth.
In closing, I recognize that tax breaks are ensconced ‑‑ once tax breaks are ensconced in the code they are incredibly hard to change. But I believe we have a rare opportunity to reassess whether the existing credits accomplish the goals that they were created to serve, or the priorities we now need to meet. In today’s fiscal environment we need to make every dollar work towards stimulating growth. I am not saying that we should cut all energy credits, but I am saying that we need to simplify and refocus them when encouraging the next generation of energy solutions.
Thank you for the opportunity to testify. I look forward to your questions.
[The statement of Mr. Coleman follows:]
*Chairman Tiberi. Thank you, Mr. Coleman.
STATEMENT OF TIM GREEFF, POLITICAL DIRECTOR, CLEAN ECONOMY NETWORK, WASHINGTON, D.C.
*Mr. Greeff. Thank you, Chairmen Tiberi and Boustany, Ranking Members Neal and Lewis, and subcommittee members. Thank you all for affording me the opportunity to testify today. My name is Tim Greeff, and I am the political and policy director for the Clean Economy Network. CEN is the largest national networking advocacy and educational organization representing clean economy companies. We have over 12,000 members nationwide, as well as 17 affiliate chapters across the country. Our members include venture capitalists and project financiers, as well as businesses that manufacture, assemble, and install energy and efficiency capacity at home and abroad. I am appearing today before the subcommittees in my personal capacity, and my remarks represent my personal opinions.
Tax policy has long been an essential component of the effort to shape and influence our energy policy. The two are so closely linked, in fact, that it is difficult to imagine a material separation. Further, we must recognize that the U.S. economy does not exist in a vacuum. Our competitors, such as China and Malaysia, use tax policy to invite investment and build domestic champions in this sector, with a strategic eye towards capturing manufacturing capacity.
Thus, rather than focusing on whether energy policy should be conducted through the tax code, it is important to focus on when and how the tax code should and should not be used in relation to energy policy.
It is necessary to mention that market signals, economic growth, and the competitiveness of the U.S. economy can not be fixed solely through the tax code. Ultimately, the long‑term market signals that will drive the advanced energy economy require a more robust and comprehensive energy policy vision. Tax policy that is not a coordinated part of this larger vision runs the risk of leading us down the same path that we are currently on.
Historically, tax policy has taken a piecemeal, technology‑specific approach. Decades of tailoring the tax code to fit needs of discreet technologies at specific points in time has created a patchwork of inconsistent policy that too often necessitates equally piecemeal fixes. In order to change course, we must begin to rethink the use of energy‑related tax policy to fit the realities of today’s energy economy.
Moving forward, there are several criteria that should be considered to increase the efficacy of energy tax policies. Very simply put, tax policy, to the extent possible, should be technology agnostic, predictable, and finite. I would like to go into each of these in a little more detail.
First, tax policy should aim to be technology agnostic, and avoid picking winners. Tax policies are sometimes written with one technology or domain in mind. This approach mutes market signals and puts the government into the driver’s seat of determining where investment dollars should go. Further, such an approach can unknowingly freeze out next‑generation technologies. The innovation cycle is dynamic, and the best available technologies today will almost assuredly not be the best several years down the line.
Second, tax policies should be predictable, and provide certainty. Most clean energy credits and programs are very short‑term, whereas energy investments are typically long‑term. Investors in businesses need certainty in order to make the investments and set their plans necessary to grow. If the credit is too short in duration, it can harm the innovation cycle, and drive money only towards technologies that are current in market scale.
Finally, tax policy should not attempt to set or replace the market. If left in the code too long, the incentives can distort the marketplace and chase off private capital in the long term from new and emerging technologies. Tax incentives should strike the balance of being long enough to send a market signal, but sunset predictably and appropriately to avoid market distortion.
Using performance metrics to determine the duration of a particular tax policy is one alternative that can more accurately reflect and absorb market variables, while also including a predictable cut‑off.
Tax policy does hold a couple of advantages over other mechanisms to incentivize advanced energy. First, tax credits are fairly transparent. They are relative easy to understand and apply for, thus requiring businesses to spend little on overhead. Second, tax policy is also relatively size and technology agnostic. In other words, almost any company can access a given credit by meeting the baseline criteria, and the value of the tax credit can be distributed efficiently, relative to the size, need, and performance of the individual company.
When it comes to energy, tax policy should serve two fundamental purposes. One, tax provisions play an important and constructive role in the innovation cycle to drive new technologies to market. Innovation in the energy sector is very capital‑intensive, and current economic realities make private investment dollars hard to come by. Furthermore, there are various points in the life cycle of a business that the private sector is sometimes unwilling to fund. Tax policy can provide small businesses with one more option to make it through this period.
Two, tax policy can help nascent technologies and industries achieve competitive scale so they can stand on their own two feet. Cost competitiveness if fundamentally achieved through market scale. With increased production insulation comes lower cost and higher quality products. Normally, market demand will drive scale up, but in a globally competitive marketplace, sometimes scale must occur before demand alone can drive it in order to be competitive, especially in capturing manufacturing capacity.
As discussions about comprehensive tax reform begin, Congress has the unique opportunity to create more consistent and streamlined tax policies for the energy sector that provide the accessibility, transparency, and certainty that investors need to invest, that entrepreneurs need to innovate, and that businesses need to grow and compete.
I look forward to working with the committee in the future to achieve this goal. Thank you for your time.
[The statement of Mr. Greeff follows:]
*Chairman Tiberi. Thank you, sir.
Mr. Lindsey, you are recognized for five minutes.
STATEMENT OF LAWRENCE B. LINDSEY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE LINDSEY GROUP, FAIRFAX, VIRGINIA
*Mr. Lindsey. Thank you very much, Mr. Chairman, members of the committee. Thank you very much for inviting me, and for your forbearance, having me on this panel.
I am not normally a supporter of legislation to steer private decision‑making through government incentives, including the tax code. My testimony today is going to focus on an example that is in the Natural Gas Act, but it is more generic, in that it reflects the kind of standards that I think the committee should apply in cost benefit analysis.
First, I think that any such legislation has to be held to a very high cost benefit standard. And I have three basic tests that: first, any government incentives that affect private decision‑making should be tied to a clearly‑defined reason why the market would not correct on its own; second, that there be an externality at the national level which would justify that such change in private sector behavior is in the national interest; and third, that the subsidy be done in a rigorous cost benefit analysis way, and that that cost benefit analysis be clearly in the direction that the benefits exceed the costs.
I think an example in the Natural Gas Act shows how one might do this. Let me begin with why the market might not correct on its own.
Right now we have a very unusual disparity in the pricing of natural gas versus oil. The ‑‑ on a normal Btu basis, one would expect that a barrel of oil would sell for about 8 times that of 1,000 cubic feet of natural gas. But currently, oil is around 80, natural gas is around 4, so you have a ratio of 20 to 1. So the question comes up: Why isn’t the market correcting? In particular, why aren’t we converting motor fuels in that direction?
I think that the answer is a pretty standard one in economic thought, and that is that what you have is a technology in place. And once you have a technology in place, it is very hard to make the transition. The example that I think of every time ‑‑ and I am sure it applies to all of us ‑‑ is the keyboard on a typewriter. We call it the QWERTY system, Q‑U‑E‑R‑T‑Y [sic].
Now, that was put in place when we did some tests about 100 years ago on how people typed, and they figured that worked. Well, we have now done a lot more tests. And, believe it or not, there would be another keyboard design that would actually about double all of our typing speeds. Here is the problem. We would all have to relearn all the new typing speed. And frankly, sir, at my age I am too old to learn stuff like that. So that is why we are stuck with QWERTY.
Well, the same thing is true in the case of oil and natural gas. In the case of 18‑wheel truckers, for example, we have a diesel‑based system. It was put in place a long time ago. It made sense back then. Although now, with the ratios I was talking about in cost, it would make a lot of sense to actually do the conversion.
Well, the problem, and the reason we have a QWERTY problem, is that you cannot just develop a natural gas truck unless you have a way of refueling it. So, even though the cost incentives of running a natural gas truck make it highly, highly competitive ‑‑ the cost is about one‑sixth that of diesel ‑‑ you don’t have a place to refuel it. It doesn’t do you any good.
On the other hand, if you run refueling stations, it doesn’t make a lot of sense to add natural gas to your product line unless you have a lot of trucks who are going to use it. And so, what we have to do ‑‑ and here is why I think that there is a reasonable case for incentives on natural gas trucking. We have to break that QWERTY problem.
When I look at the analysis, the second question is: Would it be in the national interest? And here, the intent is largely one of energy independence. And if you compare it to other tax provisions to encourage us to use less oil ‑‑ in fact, as my testimony shows, it would be quite advantageous relative to things like the renewable fuels credits, and it would be many times more advantageous relative to the electric vehicle plug‑in credit: $7,500 per car. So, I do think that, on a cost benefit test, it meets that standard as well.
Again, I thought the ‑‑ some of the suggestions on the panel were quite good on how we might redesign. But I would go back to saying, you know, do you have a ‑‑ something like a QWERTY problem that needs fixing, and that should be test one. Secondly is the change in the national interest. And third, are we doing it in a cost‑effective way? And I would urge the committee to take that approach in everything they do.
Thank you, Mr. Chairman.
[The statement of Mr. Lindsey follows:]
*Chairman Tiberi. Well, thank you all. And I will remind you that your entire testimony will be submitted for the record.
First question to the panelists. You all know that I have been publicly supportive of being a proponent of comprehensive tax reform, primarily to simplify our tax code, make it more of a pro‑growth tax code, grow our economy, create jobs. Spoke to some tax professionals yesterday and had a pretty good discussion with them about the competition that they face with respect to competitors who are headquartered in other countries, and the tax codes around the world. And I asked this question to them, and I am going to ask it of all of you, as it applies to energy.
What can we do, as the United States Congress, to make our tax code not only more competitive for our employers, but more competitive to attract additional out‑of‑country employers to create jobs and investment in America?
In the news lately we have all read about the unraveling of Solyndra ‑‑ that case is yet to close ‑‑ the increase in solar panel production in China.
And so I ask each one of you, starting with Mr. Lindsey, as we move to reforming our tax code through the efforts of Chairman Camp, as we apply it to energy, what can we do to make the tax code a tax code that makes energy ‑‑ investment in energy production, energy security, energy production ‑‑ more market‑driven with respect to our United States Economy? And I start with you, Mr. Lindsey.
*Mr. Lindsey. Well, narrowly, with respect to energy, I think the first thing one has to do is identify what the objective is. You mentioned energy independence. And then, once you do that, you really want to equalize the incentive across different ways of doing it.
Right now, for example, the electric car technology has a subsidy that is many, many times what it is for other ways of substituting one fuel for the other. That really doesn’t make a lot of sense. You are not designing it efficiently. And I think that the ‑‑ what was said earlier on the panel would conform to that.
Second question you have to decide, you mentioned domestic production versus imports. That is a threshold question. If you really want to develop domestic fuels, then I think what you want to do is you have to lower the cost ‑‑ the tax‑based cost structure of production in America.
Right now we have, in general, a tax code that discriminates against any kind of production in America for almost all industries. And I think ‑‑ and I have testified before other committees on this subject ‑‑ I think, fundamentally, that is the kind of reform we have to move to. It is one that has to be border‑adjustable.
And I think, in the end, some kind of substitution of a cashflow‑based tax for a ‑‑ income‑based tax is going to be necessary, and I think that applies to the energy side, as well as to the general production side.
*Chairman Tiberi. Thank you. Mr. Greeff?
*Mr. Greeff. I think I would go back to my several criteria. The first one is certainty. The investment cycle in energy is usually longer, and a number of the credits for renewable energy, most notably the PTC for wind energy, is very intermittent. And you have these boom bust cycles. And if investors are really going to make long‑term investments in energy and build a manufacturing capacity and a resource base in the United States, they need the certainty that the length of the investment ‑‑ so instead of attaching the credits to sort of arbitrary timelines of two years, you can attach it to production tax credits that are focused on when a particular technology would achieve scale.
And I think the second key criteria is that we need to come up with a sense of common goals. So if you look at, for example, how we incented corn ethanol, you know, it was agreed that ethanol needed to be ‑‑ or alternative fuels needed to be incented, but the government went as far as to say, “We’re going to mandate this many gallons of corn,” whereas we would say, “If the overall goal is to reduce petroleum use, or create petroleum displacement, then let’s set the goal as generally as possible, set the rules of the game, make them long term, and then let the market determine which technologies and fuels within that category are actually going to meet that standard and achieve that credit.
*Chairman Tiberi. Mr. Coleman?
*Mr. Coleman. Yes, so I agree with the points around leveling the playing field, in particular, and creating certainty. I think that what we have seen is a dislocation, in terms of the types of credits that go in, and also a level of rifle‑shooting around particular technologies.
And I think that the challenge that we face is how to create a levelized code that actually induced innovation across a whole bunch of different technology categories, and does so in a way that actually allows investors to invest ahead of those upticks in the market, the uptake of those technologies.
As was mentioned, the stop‑start approach around a lot of the renewables credits has been a challenge, and that is largely because what we, as investors, have to look at, then, is how predictable the political process is, in terms of renewing these credits, as opposed to part of what we were proposing ‑‑ what I was proposing in my testimony is if you understood that those credits would be in place for a given company by the time they got to that stage, then you could actually invest in that. You could rely on that. And so, you can actually, then, account for those credits in the finances of the company.
Today you can’t do that. And so I think what we really need is that level of certainty over time.
*Chairman Tiberi. Mr. Auerbach?
*Mr. Auerbach. Thank you. I won’t repeat what the other witnesses have said, but I will just note that my testimony recommends moving away from the tax code as the primary vehicle through which the Federal Government expresses energy policy.
I recognize that there are limitations on tax incentives, and that they work best for individuals in businesses that actually pay tax. If you are not a taxpayer, it is very inefficient to access those benefits that Congress is trying to bestow.
One recommendation I would make, just to directly answer the point, though, is that if you are going to use the tax code, let’s recognize that taxes are a drag on economic activity. And so, by lowering tax rates overall, you incentivize more economic activity. And if you want to encourage increased domestic production of energy, lower the tax rate on those producers all the way to zero, and that is going to get you a lot of activity to produce more domestic energy. The lower you go, the more activity you get.
*Chairman Tiberi. Thank you. Mr. Book?
*Mr. Book. Yes, I think the message of stability and metrics‑based decisions has been loud and clear. And I can only add more volume and more clarity.
I do think, though, there is a difference between picking a winner and knowing whether you are a buyer or a seller. A couple years ago I had a discussion with an advisor to DoE, and I said, you know, “Why are we trying to become an exporter of clean energies, when we have been a consumer for so long?” And she said, “Because we should try to compete.” And I understand that.
But if the original premise was to install, to encourage the installation of clean, renewable power, which it has done admirably, then shouldn’t we be buying the cheapest, most efficient clean, renewable power, and look for ways perhaps to support and supplement the technologies where we are not likely to be dominant? We are the third largest oil‑producing nation in the world, and we have become more prolific. It is possible that you may not want to pick winners or losers, but you may still want to be a seller when you can be a winning seller.
*Chairman Tiberi. Thank you. And finally, Dr. Marron?
*Mr. Marron. Well, I think all the good answers have been taken, so I just want to go back and echo something that Larry said in particular, which is, you know, I would start answering this question by thinking about investment incentives for the United States generally, not just in the energy sector. And I think there are a lot of problems in our current corporate tax code. And I think moving towards something that looks like a cash flow tax that gives favorable treatment to new investment is the right place to go fishing.
And then second, let me just echo the level playing field argument, that if we want to encourage investment in energy, there is no particular reason to play favorites among which type of clean energy is going to be used. Design incentives that provide a comparable incentive to each type, including ones that haven’t been invented yet, and then let them fight it out in the marketplace.
*Chairman Tiberi. Thank you. Mr. Neal is recognized.
*Mr. Neal. Thank you, Mr. Chairman. I want to thank the panelists, particularly Mr. Greeff for his comments on ethanol. Singularly one of the best and most strident arguments I have ever heard in this room many years ago was between oil and ethanol. And that strident argument was amongst the Republicans. They were at battle over that issue.
Now, Mr. Coleman, I thought you and Mr. Greeff both did a good job explaining why the nature of short‑term tax credits in the code with expiration dates that are fairly sharp discourage small business and investment. Would you reiterate that, please, again, the two of you?
*Mr. Coleman. Sure. The ‑‑ in terms of early‑stage technology companies, the kinds of companies that we invest in, we often invest years ahead of when they actually hit the market. And so the challenge is what level of predictability is there that the policies that are currently in place are still going to be in place by the time they actually hit the market.
And so, a more reliable approach would be an approach that would allow us to invest in a company, knowing that, as it scaled its production, it would actually be able to leverage certain credits in the marketplace. That means that you either have to reduce the expiration dates around a lot of the credits that already exist, or you have to create a policy that doesn’t have expiration dates in the same way.
*Mr. Greeff. I think, just to add to that, if you want to meet a person who can really stretch the value of a dollar, go find an entrepreneur. And it is ‑‑ the marginal value of money to a small business is so much higher than to a larger company.
And I think one point that I would add to Will’s comments is we also need the tax policy to be helpful and send a signal. But we don’t want it to set the market. I think too often times we have tax codes that have existed for too long for very, very mature industries. And so, when you try to crack into a marketplace as heavily regulated as the electricity and energy sector, it is really hard for new technologies and small businesses to compete in the first place.
So, there is an added level of pressure and a bigger hurdle for them to get over. And it makes the money that can come from tax policy that much more important for smaller businesses, because they face such an uphill climb just to reach the marketplace with innovation.
*Mr. Neal. The current discussion here is focused on moving the corporate rate to 25 percent. And that seems to be a very desirable goal, if it could be accomplished. But to get there, everybody acknowledges that there are going to have to be some long sacred credits that will be sacrificed along the way.
And as we move in the direction of this discussion, and centered on the idea of eliminating some of these provisions, what would the impact be in the energy area, in particular, some of the tougher energy areas, which all of you seem to agree upon? What would you give up?
*Mr. Greeff. It is an excellent question. I mean I think that it comes down to when we have to determine tax policy and determine where to sunset and where to cut, there is a time frame that we should work on. So the idea that we would just turn the switch off tomorrow is going to send a shock wave, not just through the renewable and clean energy sector, but energy sector in general.
And so, we do need to make a commitment to sun‑setting a lot of these long‑standing tax policies, and put a finite time period on them, as we reform the tax code.
However, I will say ultimately it comes down to a value judgement of how important the energy sector overall is to the economy. And we would argue that it is very important, and that, regardless and irrespective of what happens with the overall statutory tax rate versus the effective tax rate with credits, the energy tax policies are some of the most important to continue in the short term.
And again, let’s set predictable time lines for when these turn off. So when you look at the PTC for wind, for example, we need to set a long‑term extension on the PTC of, you know, four to five years to allow that industry to go before we start talking about where we are going to turn all this off, because we have to allow the markets to adjust to tax reform in the long term.
*Mr. Neal. Thank you. Mr. Lindsey, I always appreciate your candor here, you know. You know what I am speaking of. And I also appreciated your comments this week on income disparity. I thought that you and, I think it was, Glen Hubbard had some comments in the Wall Street Journal. I thought that was a worthwhile discussion that we might have down the road, as well.
But the American Chemical Council has argued that many of the subsidies in the Natural Gas Act distorts the market. And you spoke to that issue. And I thought the objective that you laid out of energy independence is one we all ought to be able to rally around. And how might you respond to their suggestion that we are really stifling investment and job creation by the use of the current incentives?
*Mr. Lindsey. Well, where I would agree is, generically, if we leveled the playing field in the ways that everyone on this panel is talking about ‑‑
*Mr. Neal. Yes.
*Mr. Lindsey. ‑‑ that would be a win‑win. Again, it makes no sense to subsidize technology X this amount and technology Y a different amount.
As I understand the concern of the chemical industry, they are a consumer of natural gas, and therefore compete as a consumer with other consumers. In this case, I think that they would be concerned about a diversion of natural gas into motor fuels, because it would raise the cost of their feed stock. I think that is their primary concern.
I am less sympathetic to that concern, because I think the issue is ‑‑ here is a specific technological change which, to me, makes a lot of sense. I do think we have to move more toward a natural gas‑based motor fuels system. I think the market is screaming for that. And I think that the existing technology barrier, the QWERTY problem, is the identified problem.
I don’t see a similar problem for the chemical industry, and that is why I am not convinced by their argument.
*Mr. Neal. Thank you.
*Chairman Boustany. [Presiding] I thank the gentleman. I want to make a few points and then pose a question. I think it is pretty clear right now across the country that we don’t have a real coherent energy strategy. And one of you mentioned that in your testimony.
And in trying to look at this as a policy‑maker, and understanding, okay, how do we do this, how do we really move forward and jump‑start a real process that gets us to an energy strategy, I think you have to, number one, understand where you are today, and what fuels we are dependent upon, and some sort of a reasonable time line of about how long we will be dependent on these.
Secondly, don’t push policies that will punish your current energy production. I think that is a no‑brainer. And some of the things we have seen coming from the administration would, in fact, do that.
Thirdly, you have to have a transition strategy, and you have to look realistically across the board, current state of R&D, innovation, and so forth to understand what is that transition strategy. And there are very few things, given the current state of R&D, that get us quickly to that point that we are trying to get to, which is ultimately energy security for the United States.
And one transition strategy, in my mind, after having spent a lot of time looking at this, is clearly natural gas. Because we know we don’t have biofuels that meet our needs yet on a big scale. Solar and wind are not going to do it. And natural gas is really the only alternative at this stage.
And I agree with Chairman Tiberi that we want to do comprehensive tax reform. We want to clear it up, clean up the code, simplify, lower rates. And so for someone like myself, the question is: At what point do we use tax policy to drive some of these decisions, rather than having tax policy driving all of our energy decisions in a very incoherent way?
And I think, Mr. Lindsey, you offered a lot of clarity in your testimony about how we should approach this when you have an issue of national interest. And I found myself very much in sympathy with what you said in your testimony.
I thought all of you did a tremendous job in helping us work through some of these very complex issues of, you know, tax credits, deductions, loan guarantees, and so forth. It is a pretty complex issue, as you look at it. But what ultimately gets us to the right policy?
And so, I am curious. As we look at all of this, I am still trying to parse down where that role for tax policy is as we look at energy security and driving this.
And I mean I agree, Mr. Lindsey. I was reluctant. I looked at this bill, the Nat Gas Act, I said, “Well, it is going counter to what we want to do with tax reform.” But does it hit that threshold, where we have a national interest and we need to do something on a temporary basis to jump start a change, a shift in technology that allows us to transition to whatever R&D takes us to next?
And I would love for you to just comment a little bit more on that. Let’s just explore that topic.
*Mr. Lindsey. Mr. Chairman, if you told me that we were going to get comprehensive tax reform, and there was no room for something like this, I would say go for the comprehensive tax reform.
With all respect to the committee and the process of the Congress, I am not holding my breath. And so, given that we have a ‑‑ why don’t we say an existing flawed system, to me, having another flaw, but a cost‑effective one, really doesn’t shock my conscience, and that is why I would be there on that one issue.
But absolutely, comprehensive tax reform would so benefit every industry involved that if that were the choice, I would go with that route.
*Chairman Boustany. Thank you. Others, please. Mr. Greeff, I think you looked like you wanted to comment.
*Mr. Greeff. Yes. Well, I mean I think, as part of a comprehensive plan, I think you have really hit the nail on the head. And we would say that tax policy certainly serves a role. But ultimately, we need to have a vision. And I think, again, it comes back to what are our agreed‑upon goals?
If we think that national security is a big part of what our energy policy should be ‑‑ which I would agree with, because there is a lot more at stake here than just the failure of a company or a sector ‑‑ we are really talking about much bigger issues. We need to step back and look at, okay, well, what is really the problem? If we can agree upon, for example, that we need to decrease our imports of foreign oil, then the codes and also standards need to be targeted at what would help us do that, without dictating the pathway.
So, again, you know, we need alternative fuels. Does it have to be corn ethanol? Not necessarily. Does it even have to be ethanol? Not necessarily. And so, we need to make sure that the rules of the game are written at the highest level possible of an agreed‑upon vision, and then let the market adjust to figure out which technologies are going to be the best ones to get us there.
*Chairman Boustany. And I think each of you have given us a reasonable framework in which to think about this.
My time has expired, but I just wanted to make one last comment.
Mr. Coleman, you mentioned the issue about R&D investment in oil and gas. And I think you have to look behind those numbers, because there is a certain level of maturation, obviously, in that technology. But at the same time, it is the R&D that has allowed us to do horizontal drilling, deep water exploration, and those kinds of things. And so those things have had value, significant value, in helping us meet our energy security needs. Because without it, yes, we probably would have hit some peak oil issue much earlier.
And so, as technology advances, and as this type of research and development and going after new types of reserves, we have to look at that as part of that equation.
My time has expired, and we will go next to Ranking Member Lewis.
*Mr. Lewis. Thank you very much, Mr. Chairman. I would like to thank each of you for being here today. Thank you for your testimony.
Mr. Greeff, I would like to start by asking you a very basic question. Backed by the recent flurry of budget cuts, there has been more and more talk about significantly reducing the size and role of government. It is sometimes seen as unreal and unbelievable, but there are forces loose abroad in the land.
Can you tell me, do you believe the Federal Government has a role in accelerating the adoption of renewable energy technologies? If so, can you tell me why?
*Mr. Greeff. Yes. I mean unequivocally yes, we do ‑‑
*Mr. Lewis. And share with me and the members of the committee your vision, your vision of the role of the Federal Government.
*Mr. Greeff. We believe fundamentally two things. Number one, that the tax code and the role of government can really be used to help set a vision, and help emerging nascent technologies achieve market scale. We fundamentally believe that it really is demand and market scale that is going to achieve the most efficient companies and technologies, and also the best cost savings for consumers when you implement these technologies and they reach maturity.
But because we have a very heavily‑regulated energy sector, because we have a very unlevel playing field, it is very difficult for these early‑stage companies and new technologies to crack in. And often times, unintentionally, we do pick winners, and have picked winners in the past, that freeze out new technologies. So we need to make sure that when the government is involved, that we are really focusing on getting towards a vision, driving innovation, driving new technologies, and helping these technologies stand up and compete, so that eventually they are attracting private capital into the system, and that it is the private capital in the marketplace that is driving these companies once they hit a certain spot.
But Mr. Coleman had some really good comments on this, and probably has something to add about exactly how we get there.
*Mr. Lewis. I would love to hear from you, Mr. Coleman.
*Mr. Coleman. Well, I mean, I think that it is ‑‑ to Tim’s point, I think that it is very much around how we get from here to there. And I think getting from here to there can take a short time for some technologies, and a very long time for other technologies.
And the question is: What role should the government play in doing that? I think it is really where there is market failures. And, you know, we, as investors, would like to see the government play as little a role is possible where we think that the market is functional, and where we think that we can invest and grow on our own accord. And to the degree that we see areas that are broken. We either stay away from those areas as investors, or we look to the government to actually make them more functional so that we, as investors, can get off the sidelines and be productive.
And I think in energy, in particular, the challenge is really around the innovation question. It is really around how we move very large infrastructure, how we transition from decades and decades of spending to ‑‑ from one paradigm to another paradigm. And that doesn’t ‑‑ you know, as much as I like to think that we as investors in early‑stage companies change the world ‑‑ I think we do, in a lot of cases ‑‑ but it is not the early‑stage companies alone that need to solve this problem.
And so, part of the challenge, I think, is figuring out how to structure these incentives so that they drive both an opening of the market, so that you can have early‑stage companies participate, and they drive investment from some of the existing corporations into the next generation of technologies.
*Mr. Lewis. Would anyone else would like to respond?
*Mr. Auerbach. Yes, if I might. I just note that when we are in the commodity business ‑‑ as the energy is a commodity business ‑‑ that incumbent technologies that have already scaled crowd out innovation naturally, because there is no place to express consumer preference for something that is innovative, and that there are certain values that the nation should express, like energy independence, and also environmental benefits that are social benefits that cannot be expressed today as a price signal to encourage alternative forms of energy production.
And so, what we are trying to do is, in effect, add externalities into the equation. But in my testimony I pointed out that even without those externalities, by virtue of the scale, the increasing scale of the wind and solar industries, that costs are already coming down dramatically, and that if we have increased expansion of those industries, that we are going to see further benefits in lowering costs, and therefore, increasing competition.
*Mr. Lewis. Now, each of you realize, as Members of Congress our most important role right now is to create jobs to get people back to work. If we do away with these incentives, what impact would that have on the economy?
*Mr. Greeff. It would have a pretty profound impact. If we cut these incentives tomorrow, as I mentioned earlier, there would be a shock wave that goes through the energy sector. Again, going back to the wind example, we don’t even have to guess. We know that when the PTC credits have expired in the past, you see anywhere from a 70 to a 90 percent decrease in orders and installation of turbines. So ‑‑ and the corresponding jobs that go with it.
I think to the manufacturing piece, I would say that we have a crisis in manufacturing in this country that has existed for several decades. And a lot of the manufacturing jobs that we have lost are very hard to get back.
I think one of the things that the government can play a role in is really capturing and going after the industries where the manufacturing jobs are still largely up for grabs. And in the emerging energy economy, that is true. And if we look forward and help drive these companies before the market may dictate that the supply would be there, we can keep some more of these companies here, and the manufacturing jobs that come along with them.
*Mr. Lewis. I think my time is up. But Mr. Chairman, Mr. ‑‑
*Mr. Book. Could I just add to that?
*Mr. Lewis. Yes.
*Mr. Book. I mean I think the cartoon‑like image that one gets is that you are sort of a cat running away from a pack of dogs, you run up the tree, out to the end of the branch, and then you start sawing off the branch while the dogs are down below.
These two things that are being discussed here, sort of the existing energy infrastructure we have, and the innovation we must have, are not incompatible. And the question is always one of balance. But it is important to remember that when you are talking about these mature industries, you are talking about mature commodity players, where gasoline stations, for example, make money at a fraction of a cent per gallon. If you start to take away anything, the market will equilibrate. The big well finance companies will always be better off, and the less well‑financed, smaller, and in some cases more innovative but conventional companies, will be worse off.
But while that is equilibrating, the jobs are going to be falling away. And so I don’t think that it is particularly useful, from a job creation perspective, to make the economics of a global consumer of a global commodity worse at any given time, and certainly not going to help our producers here. And you very well might not want to make it harder to compete within the country, because as people compete they will cut jobs with the margins.
*Mr. Lewis. Thank you. Thank you.
*Chairman Boustany. The gentleman’s time has expired.
*Mr. Lewis. Thank you, Mr. Chairman.
*Chairman Boustany. Ms. Jenkins?
*Ms. Jenkins. Thank you, Mr. Chair, thank you all. Mr. Coleman, your written testimony stresses the need for long‑term stability in federal policy, and also calls for targeting federal incentives by connecting the technologies directly to firmly bipartisan policy objectives.
But it appears that there is widespread disagreement about what relative weight, if any, should be given to various energy policy goals, such as those identified in your testimony. And even if there are firmly bipartisan policy objectives at any given point, they seem to be shifting.
So, it seems federal subsidies create inherent uncertainty in the marketplace, and I would just appreciate your thoughts on the whole issue of uncertainty.
*Mr. Coleman. Well, I think there is all sorts of different kinds of uncertainty. And it is part of what we invest in every day, is trying to understand what the market is going to look like. And part of that, in the energy sector, is trying to understand what the politics are going to look like.
And so, I think we already deal with that uncertainty today. I think, in terms of an approach to overcoming some of that, within the existing code there are a number of different structures that were mentioned in a bunch of different testimonies here today that have expiration dates. And there is an element of, if we are not going to change the code, then we probably need to figure out how to extend those expiration dates and make more certainty there so investors can invest ahead.
In terms of the approach that I was recommending, it is really focused on the innovation side of the equation, the earliest stages of these companies’ development, and also the early stages of the technology development. And the idea being that we can find some generalized numbers, some milestones around scale of production, and things like that. So megawatts produced, units sold, et cetera. And we have seen these rebates and tax programs work in other places that use these kinds of metrics.
But we can use those generalized metrics to create certainty for individual companies. And in terms of which companies would qualify, which is, I think, to your point, I do think that debate needs to happen. And I don’t know that we are going to solve that on this panel here today. But I do think that a lot of people agree around one particular one, and that is energy security.
And I think that here in the U.S. the idea of growing our domestic supplies is a really important one. And we have focused on that politically for the last century. So, hopefully we can continue to do that, and I hope we can continue to do it on the innovation side of the equation.
*Ms. Jenkins. Okay, thank you. I yield back.
*Chairman Tiberi. [Presiding] Thank you. Mr. Marchant is recognized for five minutes.
*Mr. Marchant. Thank you, Mr. Chairman. I can tell you from my constituents back home what they favor is not giving loans like have just been given to Solyndra and seeing a half‑billion dollars wasted, which has hurt the entire energy credit reputation. And what they are telling me when I go back home and have town hall meetings and meet with my small business people is, “Do away with all of these credits, lower our tax rate, and let the best product win, the best service win, and get out of the whole business of subsidy.”
Realizing that that is going to be a struggle, and realizing that is a goal and this committee is really working on it, I have been very interested today in a couple of the concepts that have been discussed.
Mr. Auerbach, could you walk through the reverse auction strategy for me, and how would it maximize any taxpayer dollar that was invested?
*Mr. Auerbach. Yes, thank you very much. The reverse auction mechanism, it relies more on the market than on government mandates to set a price. And it is self‑limiting, because what we start off with is, say, “Let’s encourage more domestic production of energy.” And we talk about wind, solar, biomass, and also oil and gas. All of those are ‑‑ what we are talking about in reverse auctions ‑‑ are made‑in‑America energy.
And so, the reverse auction mechanism would divert revenues from expanded oil and gas drilling. Part of it will pay down the deficit, which is, of course, a national priority. And then some of it will be allocated to a trust fund and allow renewable energy developers to compete for that access to that capital.
In the slides that I pointed out, I pointed out that renewable energy costs are coming down already. And I believe if you opened it up to competitive auctions, that fewer and fewer dollars would need to be allocated for every megawatt hour of renewable electricity produced, and you let the market do it.
In the proposal that we are advocating, every year the ceiling price from the reverse auction would go down five percent automatically. And so, we are phasing out ‑‑ again, with a market‑based mechanism, the support for renewable energy technologies, and we are letting that go.
One comment I would make to your constituents, though ‑‑ and I understand the concern, I understand very well; as an investor, I don’t like losing money, and Solyndra is a black eye ‑‑ but if you analogize where we are today as driving on the highway at 70 miles an hour ‑‑ 65, let’s say, because that’s the speed limit, so I’m not saying we should be going faster than the speed limit ‑‑ a light hand on the steering wheel is understandable, and that is the way I believe government should operate. Taking your hands off the steering wheel at 65 miles an hour is perilous.
And so, just abandoning all responsible oversight and government activity to support the growth of the industry would be taking your hand off the steering wheel at a time it is hurtling down the highway at 65 miles an hour. And I believe that the overreaction to some very bad news and distressing news about the Solyndra situation would also create problems and unintended consequences.
*Mr. Marchant. And as a follow‑up question to Mr. Coleman, I don’t think I misheard you, but maybe I did. You said that the top five oil companies in America spend almost nothing for R&D. Would you clarify that a little?
*Mr. Coleman. Yes, they spend less than two percent of their profits on R&D. It is one of the lowest numbers of any industry. And while I think that is an eye‑opening number, at the same time I agree with the chairman’s statement, which is we have had a tremendous number of innovations over the last 50 to 100 years, particularly in oil and gas, and that is a large reason why we continue to have increased access to supply here in the U.S.
Our point is more that, as an industry that is not investing as much as other industries in R&D, there is an enormous amount of opportunity for new innovation in next generation technologies. And we believe that it is not just going to come from start‑up companies and emerging technologies. It is going to come from the oil and gas industry, and it is going to come from some of the biggest players who already exist in the energy industry. And we see those folks as partners.
And so, the hope is that you can create a policy that brings those companies to the table and encourages them to realign their investment choices around not just the things that will increase supply today, which I think is critical, but around those things which will increase supply and decrease cost over the long term.
*Mr. Marchant. But even at two percent, that gross dollar amount that they are spending, if you compare it against the gross dollar amount that is being spent by all of the other combined industries, aren’t they comparable numbers?
*Mr. Coleman. I don’t have the absolute numbers sitting in front of me. I don’t believe that they are, although I do ‑‑ I would say that the oil and gas industry is one of the most profitable industries in the world. So ‑‑
*Mr. Marchant. Thank you.
*Mr. Coleman. ‑‑ it is a good number to have.
*Chairman Tiberi. Thank you. Mr. McDermott is recognized for five minutes.
*Mr. McDermott. Thank you, Mr. President ‑‑ or Mr. Chairman, for having this hearing.
As I look out on this committee, or this panel, I am really pleased to see people who believe in the market. And they think the market is the thing that we must worship at. And as I look ‑‑ I watched what happened yesterday on the floor, when the floor was controlled by people who really believe that government should have no role in doing anything.
I have a question for all of you, because we had a bill. We had a 48© extension here in the committee. Members of this panel all signed on, said we ought to extend the manufacturing credit for solar things and other things, and it died. Okay?
Now, 1603, direct payment for wind and solar credits, is going to expire at the end of this year. Ethanol expires at the end of 2011. Renewable diesel and biodiesel expires at the end of this year. And alternative fuel credit, natural gas, expires at the end of this year. If this congress acts like they acted yesterday, and said, “We don’t want the government involved in this stuff,” what is going to happen in the market?
How will the market react if the Congress pulls out of all of those programs which are set within four months to be gone? I would like to hear you all respond to that. Sir?
*Mr. Book. I would be happy to answer that, since I talked to some of those investors every day. And it scares them very badly. And their job is to make money. They are very conservative, and they dump investments that they think are overweighted with risk.
The gentlemen to my left are all very good at making money, so the analogy that I was suggesting was a portfolio. And they don’t put all their eggs in one basket, but they also don’t get out of the market entirely, or there wouldn’t be anything in it.
I don’t think anyone here is advocating dumping all of subsidies ‑‑
*Mr. McDermott. You think the Congress is going to extend all these?
*Mr. Book. I certainly don’t, and that is the point of a metrics‑based analysis. Figure out what you want to do that is working well, allocate a certain amount to that. Look at the things that are sort of higher risk, given an amount to that, based on efficacy and numbers you can quantify, and then save a little bit for the moonshot, and make sure that you have a balanced returning portfolio, in terms of energy security, environmental benefit, and innovation and the benefit that brings it home.
*Mr. McDermott. Maybe I should have asked the question a little differently. Which ones of these should we save to save the market?
*Mr. Auerbach. Well, can I start off?
*Mr. McDermott. Sure.
*Mr. Auerbach. First of all, I am a believer in the market, I don’t worship the market nor government.
But I do believe that the Federal Government, by abdicating any responsibility for the market that exists would create chaos. And as a capital commiter that has committed hundreds of millions of dollars of investment capital in the United States, the expiration of some of these incentives is going to create chaos and is going to create job losses.
What I advocated in my testimony, both oral and written, is really ‑‑ one point about section 1603. Some people don’t like it because it is associated with stimulus. But it represents efficient use of government dollars, as I think every ‑‑
*Mr. McDermott. You mean it was a good idea?
*Mr. Auerbach. I think it was a ‑‑
*Mr. McDermott. From the Obama Administration?
*Mr. Auerbach. It was a great idea. I was one of the ones who actually was involved in working with the Administration and both Houses of Congress in talking them through how it would benefit the industry.
Ultimately, since I believe that cash is a better way ‑‑ when cash transfers hands it is a much easier currency than the foreign currency called a tax credit, that the vast majority of our industry cannot efficiently utilize.
Interestingly, 48©, well, if you look at 48©, we were a beneficiary of 48©, and we could not access a dollar of it, because we were not a taxpayer. One of our companies was afforded a $51 million tax credit that we couldn’t use. If we got the cash payment, we would have been creating more jobs. And 60 percent, in my estimate, of the recipients of 48© will not be able to access that tax credit.
So, the more we understand about how tax credits are used by taxpayers, I think the more effective your policy can be.
*Mr. Greeff. Just one comment to that to sort of clarify the point, I think that the discussion we are having here now makes the point of where we think the role of government should be. If you have tax credits that are based on things like arbitrary deadlines, then every couple years we are back here making a decision.
What we would argue is we shouldn’t be making this decision. The government can set metrics‑based performance standards or, you know, whatever the metrics are, make them long term and predictable enough that the market knows where it is going to head. And I will use an anecdote.
One of the things that I would say in the clean energy sector of the emerging companies that we would say makes a difference between a young and a more mature company is the more mature companies actually have a line item on their spreadsheet that has public affairs, government affairs, as a cost of doing business. And I think that when we have a system that forces companies to have to interact with the government all the time to make sure that every other year, that there is more consistent policy, that is not a helpful system.
We want to have it so that they are spending their money building factories, and they are spending their monies hiring people. They are not spending their money having to interact with the government all the time to make sure that these credits become more consistent, or that a better energy vision is laid out.
*Chairman Tiberi. The gentleman’s time has expired, but anybody else want to reply? Mr. Lindsey?
*Mr. Lindsey. Senator, I think if you actually look at the cost per gallon on a lot of those, I think you would ‑‑ I would be one who would certainly want to phase some of them out. I think you mentioned ethanol. I think that is one of the most highly subsidized, and it definitely doesn’t meet any kind of standard of cost benefit analysis. You may not want to yank it right away, but it makes sense. I think the same thing is probably true with biodiesel. I think solar credits generally do not pass the cost benefit test. So I would be sympathetic to at least phasing many of them out.
If I might indulge ‑‑ if you would give ‑‑ please, related to that ‑‑ and I have heard the word “jobs” a lot ‑‑ and, Mr. Lewis, I agree with you 100 percent on the importance of that. To show you how old I am, 29 years ago I was working with a guy named Larry Sommers in the Council of Economic Advisors, and he wrote a memo on Thanksgiving 1982 to the President. There was a proposal then that we create jobs with infrastructure, road building. And Larry Sommers wrote the memo and said, “You know, Mr. President, if you do this, you have to think, ‘Compared to what?”’
Turns out that infrastructure is a less labor‑intensive part of the economy than the general economy. So if you take money from the general economy and put it into infrastructure or, frankly, if you put it into energy creation, you are not creating jobs net/net, you are actually destroying jobs. Now, so a lot of what you are talking about will cost jobs in the industries here. But on an economy‑wide basis, if your sole objective is to create jobs, I would axe most of those subsidies.
*Chairman Tiberi. As I said, the gentleman’s time has expired. Anybody else want to ‑‑ very good questioning, Mr. McDermott. Thank you for always providing some interesting ‑‑ anybody else?
*Mr. Book. Could I just add a ‑‑
*Chairman Tiberi. Sure.
*Mr. Book. I think that what we are talking about here ‑‑ in many cases, we are all saying the same thing in different ways. But what Mr. Auerbach said, I thought, was really important. He was asking how much of that money that you are putting into any of these sources flows through to the actual purchase of the thing you are buying? That is the thing I call the return on tax.
And I know it sounds like a crazy thing for people who believe in free markets to say, but if you want to give away money, give it directly away ‑‑ is a very sensible proposition. What Mr. Lindsey said very eloquently is that, guess what, capitalism works. And the reason why you have lower labor intensity in the things that work at big scale is because that is why they are successful in a capitalist economy.
That does not mean, however, that you won’t lose jobs. If you take things that currently benefit those industries away, it does mean ‑‑ I think you would have to agree ‑‑ that allocating ‑‑ if jobs is your only criterion, there is some very labor‑intensive things you could do, and renewable energy, in some forms ‑‑ agriculture‑based renewable energy can be very labor‑intensive.
We don’t necessarily want to live in an agrarian economy, though. I mean I think this is a balanced question. We are an industrial economy, and we want to create high‑value jobs.
*Chairman Tiberi. Thank you, thank you. I now recognize the gentleman from the booming energy state of North Dakota, Mr. Berg.
*Mr. Berg. Thank you, Mr. Chairman. I have been anxiously awaiting to ask questions here. You know, obviously, in North Dakota we have taken a strong approach the last 10 years to not just look at oil, but look at all energy sources, and try and remove barriers and encourage their production.
So, Mr. Greeff, I would like to kind of start just in kind of the big picture. I mean what can Congress do to provide certainty in the energy industry overall, encourage economic, you know, growth, and also, from a big picture, I think our goal should be energy independence.
So, if you were going to say, “Here is three things that Congress can do now,” what would they be that would move us towards that end?
*Mr. Greeff. I think, based on energy independence being the goal, I think, number one, we have to set ‑‑ all policies need to have that fundamental goal as the bottom line. And that would include, you know, reducing our dependence on foreign oil ‑‑ and I would say oil, overall ‑‑ diversifying our energy portfolio, like anyone would diversify their investments. We depend far too much on far too few sources of energy. And we would want to make sure that we capture and produce as much of that energy at home as possible, so that the dollars that we do spend on energy are being spent domestically, and driving the economy.
I think a second point is that we can’t ignore ‑‑ because there is often times a focus on the role of the Federal Government, but again, when you get down to the local level, most energy markets are protected monopolies, and they are limited. And getting into ‑‑ cracking into some of these industries is difficult.
When you look at, for example, that in the rate base of some utilities there is an economic and financial disincentive to be more efficient, that is a failure of the policy system. And we have got to start to fix that, so that actually you are not expecting utilities to lose money if they help end use users become more efficient. Because that is in the public good, that is in the public interest. And so, we can’t necessarily just separate the federal policy for more local policies. And we know that that is tricky, but that is something that we need to walk into with our eyes open.
And I think the last point is that we do need to have a more comprehensive view that doesn’t just depend on tax policy, doesn’t just depend on performance standards. We can’t evaluate everything in a vacuum; we have to look at it and make sure it functions together. And if we can look at where we want to get to, if we can set the rules of the game, put them long‑term, so that the touches of government intervention and the number of times that we have to have these conversations become fewer and further between, that is going to allow the market to adjust in the long term.
*Mr. Berg. Well, thank you. I have been in the commercial real estate investment world for 30 years, so I understand how ‑‑ I mean we would think that your whole decision is based on tax policy, but the reality is that is just one component of making your investment decisions.
Mr. Lindsey, you had mentioned that the tax code discriminates against production. Could you just expand on that, briefly?
*Mr. Lindsey. More precisely, it discriminates against domestic production. So, if you produce something in North Dakota, the workers have to pay both employer and employee side of FICA, they have to pay income tax, they have to pay corporate income tax. If you import the same good from Manitoba, none of that tax is borne.
Now, Canada has got a similar tax structure, so it is there. But if you think about it as China, none of that is taxed. We have a tax ‑‑ we disadvantage our own manufacturers. What you need is a border‑adjustable tax system, and it should be based on cash flow, and not on income, because income is not the thing you really want to tax. You want to tax something more generic than income.
*Mr. Berg. Thank you. Mr. Coleman, you had mentioned ‑‑ I may not have it quite right, but one solution would be a volume‑based energy incentive system. I know you talked about it a little bit earlier. Could you just briefly recap that and give me an example of how that would work in real life, if we are transitioning from where we are now to maybe no incentives?
*Mr. Coleman. Yes. So a volume‑based system would be one that shifts from the current approach. So if you think about the way we currently approach tax policy around energy, typically it is ‑‑ we have technology buckets. So we incent solar a certain way, wind another way, oil and gas a different way, natural gas a different way. And the challenge there is that the government necessarily has to figure out not only what the appropriate allocation is to those individual buckets, but has to listen to us sit here on these panels say whether, you know, one technology is better than the other on a pretty repeatable basis.
And so, the issue there is that when you are trying to figure out how to most effectively then incent those technologies, you also have to figure out when they are ready to move off of subsidies. And we have this semi‑annual debate associated with whether or not a technology category is ready.
The challenge is that when you look at the technologies inside even a single bucket ‑‑ let’s just take solar, for example ‑‑ you have some technologies that have moved all the way down their cost curve to the point ‑‑ the chart that was brought up here earlier ‑‑ those cost curves come down very steeply, based on innovation, and then on scale. They may have gotten to the point where they are at the bottom of the cost curve, and there is others that are just beginning to come down it. But they are also solar companies.
And so, the question is, if you roll that tax credit off at that point, the most mature companies may well be able to compete. But the ones that are most innovative ‑‑ and they may have a cost curve that goes well below where the most mature companies are ‑‑ the ones that are most innovative won’t get any portion of that credit.
And so, when we are investing in some of those early innovative technologies, we look at those policies and we say, “Well, will they be there by the time that these companies actually hit the marketplace?”
And so, the approach that I am proposing is one that looks at the scale of the technology and says there will be a credit for companies that innovate in a given set of categories, and it will last until they get to a certain volume, and then it will start to roll off for that given company. And we have seen it happen in programs all over the place.
One of the ones that is closest to home ‑‑ and I am going to dare drop a California example here ‑‑ is the hybrid rebate that was put into place, where, basically, for the initial volume of hybrids, there was a rebate put into place and then it rolled off once an individual company got to a certain volume. So, other companies could enter the market with a new hybrid, and it would roll off for them over time.
But effectively, what that does is it gives us a level of certainty, as investors, to look at how that policy structure ‑‑ and say that will be there by the time the market hits that scale, and so we can factor it in, and we can invest ahead of it. And it should be applicable, not just to start‑ups. It should be applicable to any company that is undertaking technology innovation.
*Mr. Berg. So the point is you get to a point where the goal is to make money for the company, and they are making more money by increasing their volume, increasing their sales, and as that happens their incentive reduces.
*Mr. Coleman. Yes ‑‑
*Chairman Tiberi. The gentleman’s time has expired ‑‑
*Mr. Berg. I will yield back.
*Chairman Tiberi. ‑‑ go ahead and answer the question.
*Mr. Coleman. Yes, the point is to help these companies get to a scale where their cost is fully reduced. And by the time they are mature, and their cost is fully reduced, they should be able to compete in the marketplace alone, rather than be reliant on subsidies, going forward. We want to invest in the companies that ultimately compete without subsidies.
*Chairman Tiberi. Thank you. Mr. Reed is recognized for five minutes.
*Mr. Reed. Thank you, Mr. Chairman. This has been very informative. I really do appreciate the panel’s input. Obviously, as we deal with energy policy going forward, tax policy in the energy field is going to be a critical piece to that comprehensive plan.
I am a guy who believes in all of the above: domestic, renewables, alternatives, fossil fuels, et cetera. And one consistent theme that I am hearing here, and I have heard it before, is the certainty in the tax policy is critical to getting this correct. And, as a new Member ‑‑ new member of this committee, new Member of Congress ‑‑ there is a reason why the tax code is in the condition that it is, with the short‑term extenders and things of that nature.
Mr. Lindsey, you have been around quite some time. I appreciate your candor with us. Could you offer some advice or insight to a new Member as to what is the primary reason why we have the code in the condition that it is? How can we ‑‑ what are the barriers to that certainty of getting the long‑term tax policy initiated?
I have some personal opinions, from the short term I have been here, that there are some institutional issues, the scoring issues and things like that, but could you offer any insights that maybe I am ‑‑ that would be helpful to me as we develop this policy?
*Mr. Lindsey. Yes, I have been through this quite a few times.
The first thing is ‑‑ and this is something you can’t do anything about, it is the nature of our democracy ‑‑ obviously, the nature of the committee changes, the Congress changes, and different Members have different objectives. You know, it might be jobs now, it might be inflation another time, and it might be energy production. You can’t do anything about that.
I think, though, that the thing you can do something about is the focus on income‑based taxation. There is a saying on Wall Street that cash is a fact, income is an opinion. And when you are dealing with an opinion, it is very, very easy to change your opinion. And that is why, “Well, let’s see, is this really income now? Maybe we should have a deduction here,” I mean all the complexity really comes down to defining income.
On the other hand, if you have a cash flow tax you are really looking at something called receipts. And it is very, very hard to argue about the definition of a receipt, much, much harder than it is income. And I think if you ‑‑ as a new Member, I think what you would want to do if you actually want to have certainty in the code and everything else, you want to move away from income‑based taxation and toward receipts‑based taxation, or cash flow‑based taxation.
*Mr. Reed. Any other insights from anyone who has been here a while?
*Mr. Auerbach. Well ‑‑
*Mr. Reed. Mr. Auerbach?
*Mr. Auerbach. Yes. I started my career, actually, as a tax lawyer, and made a living off of the uncertainty, advising taxpayers or clients that were very nervous. And I also worked in Washington for a couple years in the government, being on the other side of that.
Part of the problem ‑‑ and I don’t want to say this in an impolite way ‑‑ is, you know, I would actually like to get energy policy outside of this room. And H.R. 909 and the reverse auction mechanism that I am advocating here ‑‑ and I hope is going to enjoy bipartisan support, but right now is supported mostly by Republicans ‑‑ is trying to set up a mechanism that is long‑lasting, self‑implementing, and does not require the constant review before Congress every other year that has been built into a code incentivizing renewable energy since 1993.
There have been 5 times over the last 18 years where the credits just died in their tracks, thousands of people were laid off, capital flows stopped, and then they started again. And so, if we can set up a system that has already been architected ‑‑ and we have been commenting on it, about how to make this long‑lasting and self‑implenting ‑‑ and get revenue sources that are monitored by Congress but actually outside of Ways and Means, I actually think it is going to provide a lot more certainty for capital commiters. It is a much more natural way for the system to work.
So, that was ‑‑ that would be my advice to you.
*Mr. Reed. I appreciate that. Yes, Mr. Marron?
*Mr. Marron. I guess just ‑‑ the one other thing I would add is the way the budget process and budget discussions happen in Congress ‑‑
*Mr. Reed. Amen.
*Mr. Marron. ‑‑ which is, as you have experienced, 10‑year budget estimates are the coin of the realm.
*Mr. Reed. Yes.
*Mr. Marron. And that just creates a natural incentive for people who want to extend something to extend it in little bite‑sized chunks at a time. And so folks can get enough political will to extend it for a year, and then revisit the next year. And that is not something that necessarily leads to a good long‑run policy.
I don’t know how you would solve it as a process thing. But if you and all your colleagues could say, “Look, if we are going to consider a tax incentive to encourage some activity, we will commit to either do it for five years, or let it die,” that would be kind of the place you would want to end up.
*Mr. Reed. I appreciate ‑‑
*Mr. Marron. At the moment, the budget dynamic is year‑by‑year.
*Mr. Reed. Yes, that is exactly what I was looking for on the record.
One last question, just a quick yes or no. Because I am an all‑of‑the‑above person, can we achieve energy independence solely on alternative renewables? Does domestic fossil fuel production and development have to be part of that equation?
*Chairman Tiberi. The gentleman’s time has expired. Everybody will answer yes or no.
*Mr. Reed. Thank you.
*Mr. Lindsey. No to the first, yes to the second.
*Mr. Greeff. No to the first, yes to the second.
*Mr. Coleman. Yes to the first and yes to the second.
*Mr. Auerbach. I would say no to the first, and yes to the second, as well.
*Mr. Book. No the first, yes to the second.
*Mr. Marron. We will never achieve energy independence within the lives of the grandchildren of the folks here in this room.
*Mr. Reed. Thank you for that.
*Chairman Tiberi. We have two more Members who are going to ask questions, and I ‑‑ yes, cancel the next panel, right. No, I am just kidding.
Mr. Lindsey, I know you had to go, and if you do need to go, you are excused from this panel. Thank you for your generous time commitment. I know you had ‑‑
*Mr. Lindsey. Thank you for your forbearance. I appreciate it.
*Chairman Tiberi. Thank you. I recognize Mr. Kind for five minutes.
*Mr. Kind. Thank you, Mr. Chairman. On that happy note, first of all, I want to thank the witnesses for your testimony, and thank the committee for holding this important hearing. I think it is very, very helpful that we have periodic hearings like this to see whether or not we are getting a good bang for the buck that we are trying to incent or invest as a nation. And these periodic reviews might be a little easier if we went to a biannual budgeting process, as opposed to trying to move everything every year, which provides very little time for oversight with a lot of these programs, and the discussion that we are having today.
One of the concerns I have ‑‑ and I think it was addressed earlier in the hearing with a question ‑‑ is if we have got a national strategic energy policy, I don’t know what it is. I don’t know where we are going, as a country, with all of this. It is just a hodge‑podge of a lot of things, and we see it riddled in the tax code, too, seeing what might work or what might stick and what doesn’t.
And I appreciate the testimony we heard in regards to some predictability and longevity with some of these decisions, so that businesses know what to wrap their arms around, and what is going to be certain in out‑years, as opposed to being taken away from them after they are willing to invest capital and time and energy to start moving in that direction.
But what makes this conversation a little bit difficult to have is a lot of the hidden costs with our energy policy today. And let me just cite one example of that. I think it was back in 2002 or 2003 I cited a Department of Interior’s website where they had listed the cost of maintaining safe shipping lines to the Middle East to our shores of roughly $80 billion a year. And I started publicizing that on my own website and started talking a lot about it. And then suddenly the Department of Interior dropped it from their website. And that is one of those hidden costs in our own energy needs as a nation that never really gets explored or factored in to everything else that we are doing. And that makes these type of conversations a little bit problematic to have.
But I also know that, as an example, the 25© tax credit for residential efficiency has had an economic impact for manufacturers in my district, from Trane to A.O. Smith that have benefitted, the Andersen Windows that have benefitted through the increase in sales, which has meant hiring, but also the impact that it has had for a lot of families.
I recently visited an older couple’s house earlier in the year that made an investment with new insulation and high‑efficiency furnace and that, because of the tax incentives. That spurred them to do it. And they went from $410 a month in heating costs to roughly $90 a month in heating costs. Huge difference in that family’s life, but it was because of the tax incentive that spurred them to take that type of action.
So, I guess I would be interested to hear your feedback on how valuable it is to have some of those incentives out there, just to overcome the battle of inertia that we often face in the nation, getting people to do something which makes complete economic sense for them to do, but without that incentive they probably wouldn’t, because of the power of inertia.
Does anyone want to take a stab at that? Mr. Book?
*Mr. Book. Well, Congressman, I have enjoyed conversations about renewable energy with you in the past, and efficiency. And I would have to say that I haven’t done the quantifying of that particular example. But what you have just described is something that seems like it had tremendous MMBtu for the buck. And you know, if you are going to judge the efficacy of these policies on a metric ‑‑ and that was one of the ones that I think a lot of us recommended ‑‑ it sounds like it is a highly effective policy. And that might be a reason why you would explore continuing the things that are working, saving some for the things that are possible, and allocating a small amount, because we need innovation, irrespective of performance to generate ideas.
*Mr. Kind. Yes. And I think it is kind of two different questions here, too. One is: What do we need to do to build in business predictability on what we are doing? But also, what do we need to do to get people to take action?
And part of a way of achieving that is by letting these things expire, and people knowing that they are going to expire, so they got to move now in order to take advantage of it, which, I think, is a lot behind the American Jobs Act, trying to get something done now, rather than knowing it is going to be there for another five years and we have got time to wait.
*Mr. Book. That just shifts demand forward, it doesn’t actually create anything. It creates a lot of lobbying dollars locally spent here in the District of Columbia ‑‑ thank you for my home value appreciation ‑‑ but the real effect of creating an innovation center that generates ongoing value is much bigger. And the problem with shifting demand forward is that it is not new demand. And so, I mean you do get a short‑term pop. It is like cash for clunkers. But then there is a lag if nothing fundamentally recovered to replace what you shifted forward.
*Mr. Kind. I understand and appreciate with the economic models the need to develop something more long term, but we are stuck right now as an economy, because of the lack of aggregate demand. People are scared, and they are hunkered down, they are paying down bills, they are not making purchases, and jobs are not being created. So shouldn’t we be trying to juice short‑term demand, just to get things going again?
*Mr. Book. It is messy. It works sometimes very well, but it usually has problems and conflicts. And some of what the first panel was describing sounded like some of the conflicts that come up with it. The rich man’s rebate for hybrids for people like me who drive 3,000 miles a year is being spent on vehicles that low‑income families can’t source. Insulation in walls is what a lot of these families need, but people in my neighborhood can buy solar panel systems for $80,000.
You do have to look at how these demand‑side incentives work. And they are very hard to get right.
*Mr. Kind. Great. Thank you. Thank you all again. Thank you, Mr. Chairman.
*Chairman Tiberi. Thank you. Ms. Black is recognized for five minutes.
*Ms. Black. Thank you, Mr. Chairman, and I think I am bringing up the tail end here. Thank you, panel, for being here today. Very informative.
I want to go to the issue of winners and losers when tax credits are created. And in specific, I have a manufacturer of water heaters in my district. And because of the way the tax credit was written, it benefits foreign manufacturers over our U.S. manufacturers. And that means U.S. jobs.
And so, what I would like to hear from you all is how can we be sure that we are not picking winners and losers, and that we are having a level playing ground and, in particular, that we are looking at making sure that playing ground is level, so that our jobs are kept here, in the United States? Anyone want to jump on that one? Yes, Mr. Marron.
*Mr. Marron. Okay, I will be brave and go first. I think the unfortunate reality is that if you try to use the tax system to provide subsidies for these kinds of activities, it is virtually impossible to literally accomplish a level playing field. You will see in the testimony of some of my colleagues up here on the panel the complicated calculations they go through in order to figure out what the implied value per MMBtu or value per CO2 saved, or value per gallon is. It requires an enormous amount of math.
Now, try and imagine to do that here in the committee to design subsidies to target each possible way one might save energy. And the reality is just you are never going to get there. So a fully level playing field is incredibly hard to accomplish on the subsidy side.
I know it is an unpopular message, but actually you can accomplish a level playing field if you are willing to do things on the tax side. If you say, for example, that oil is a bad thing to use because of national security concerns and you have an oil tax, if you believe carbon emissions are bad you tax carbon emissions, that can then filter through the economy and establish a level playing field.
Now, I am not offering that as a raise‑tax thing. You can then couple that with cutting other taxes, so that it is net‑revenue‑neutral. But I recommend that if you really take seriously the level playing field, that that is a place to look.
*Ms. Black. Others have a comment on that? Mr. Coleman?
*Mr. Coleman. Well, I would just say, at the risk of sounding like a broken record, I think the issue is you really need to simplify the code, number one, and I think that means trying to figure out how to carve out the hidden components of the code, and trying to put them all sort of above the table.
And the other is really making sure it is a metric‑based system. So, you know, to the points that were made earlier by a number of different panelists, making sure that we align it with the metrics that define the priorities we have. So if it is energy security, then there are certain metrics associated with that, making sure that those that are eligible and those that take those credits fit the bill, and that they get the credits based on the amount that they actually produce, and the amount that they actually meet that objective, I think, is the simplest way to do it, and make sure that you have a level playing field.
*Mr. Auerbach. I would just add that, again, there have been a number of ideas, I think, proposed by the panelists in their testimony, including myself, that go to encouraging increased domestic production of energy of all sorts. We have to be careful, as we design policy, that we do not violate international trade agreements to block out foreign competition, because they are going to retaliate and do that to us, as well. But there is nothing wrong with encouraging domestic production.
But again, the more that we can create market‑based mechanisms for all of this, I think the better off we are all going to be.
*Mr. Greeff. I would go back to my comments earlier about the need for a comprehensive vision, that, you know, tax policy is a role, but let’s look at international security. And if we look at, for example, our dependence on foreign oil, there is demand side and supply side, and you probably need to have a separate set of policies for that and focus on the demand side, the biggest use in the transportation sector.
Instead of going back to the earlier example about corn ethanol and saying, “That’s the one that we are going to pick,” you have things that work in concert, such as the café standards that say, “We want to set a fleet average of miles per gallon.” It doesn’t dictate to the auto makers what type of car technology they have to use. It sets an aspirational target for what the fleet average needs to be. So they still get to make SUVs, but it also pushes them to make more advanced technologies with better combustion engines, hybrids, electric vehicles, et cetera.
And then, at the same time, you can also use tax policy to bolster the next generation technologies. And, to Will’s point, not just for start‑ups, but also for the large companies, so that they are actually looking and innovating to what is that oh‑wow, next big thing that they wouldn’t necessarily invest in otherwise. If we have more of a vision and we use all of the different tools in our toolbox, we will have a much more comprehensive policy that picks less winners, and lets the market adjust to what the aspirational goals are.
*Ms. Black. Thank you all very much.
*Chairman Tiberi. The gentlelady’s time has expired. Thank you very much.
Last, but not least, the gentleman from Connecticut is recognized for five minutes.
*Mr. Larson. Thank you, Mr. Chairman, and thank you so much for holding these important hearings. And thank all of our panelists, some of which I know had to leave already.
But just a general question. I think all of you are in agreement, in terms of the need for comprehensive tax reform and how that would benefit, overall, all of our industries. And I think there is probably broad agreement on this committee with respect to that, as well.
I am concerned, however, that if the United States doesn’t supply various types of technology in commercial adaptation, that we run the risk of having other nations ‑‑ I come from a state that is a fuel cell sector state, and we see with the great interest that Korea has in making sure that that industry has a place to grow and thrive over there, through government investment.
It is always a concern about picking winners and losers, but in new and breakthrough technologies, what is the feeling of the committee with respect to that? And if we could, just briefly go through whether or not government should be involved. Or is this something that you purely leave up to the marketplace, especially when other countries, especially in the energy‑related areas, are looking to eat our lunch?
*Mr. Auerbach. Well, I will just start by pointing out one thing that we haven’t talked about. There has been some mention about some due diligence failures associated with one loan guarantee for an innovative company, which is unfortunate. But put in context, where some of our competitors are ‑‑ that I view also as trading partners ‑‑ China, the Chinese Development Bank, CDB, which is somewhat equivalent to our Ex‑Im Bank, has provided over $30 billion in loans to support their native industries, scaling up their renewable energy. And many of those are innovative companies that are increasing their scale and lowering their cost.
And so, if we abandon, if we don’t provide systems of support to encourage domestic innovation through whatever means we think is most economically efficient, we are going to end up increasing our trade deficit because, ultimately, we will find those products attractive. And instead of having our share of American products, it is going to all be coming from overseas.
*Mr. Coleman. Yes, I would just add that I do think we need to support emerging technologies, and that was the brunt of my testimony. I think the way that we need to do it, though, is in a technology‑neutral way. So I think the closer we can get to a metric‑based system, the better off we will be.
*Mr. Larson. There is a great deal of conversation currently in the Congress and several bills that abound with respect to an infrastructure bank that is both partially funded by government providing the base for seed capital, but then with a board, and with investment coming from the private sector. Could the same kind of innovation bank work for the country?
*Mr. Book. Congressman, I have testified on this before the Senate in the past, and I was sad to see that the ‑‑ some folks tend to talk about a green bank as a Fannie and Freddie for clean energy, and they don’t mean it nicely.
There is actually a problem with the current loan guarantee program that has nothing to do with due diligence. It has to do with the way financing has to work for real industry at a real‑time basis. The portfolio that you are able to catch is probably not going to out‑perform the portfolio Mr. Auerbach has. He can turn around a term sheet quickly. He has the autonomy to choose financing mode, he can decide whether he is going to take warrant coverage or equity, he can decide if he’s going to debt finance something with venture convertible security interest.
If you give that kind of autonomy to a government agency it has to be limited, because you don’t want to crowd the folks who do it for a living out of business, because they do tend to yield an awful lot of it. But having it done right probably would involve giving it autonomy and the ability to work in real time, as the Ex‑Im Bank does.
*Mr. Larson. Would that enhance or detract from your efforts, Mr. Auerbach?
*Mr. Auerbach. I think it would enhance. First of all, thank you for the question; it is a very important one. Let me just point out that there are various versions of a bill for supporting a clean energy deployment administration. Some of them call for agency‑driven locale for it, others independent. So it is somewhat different, but similar to the infrastructure bank illustration that you have shown.
Let me give you one personal example. We went through the loan guarantee program and successfully procured a loan guarantee. We started our application in December 2008. We were finally awarded the loan guarantee about two months ago. Nearly three years in due diligence and then in documentation in order to get a loan is not exactly fleet‑footed, and is not going to support American competitiveness.
We understand the grave concerns about the due diligence process and the capacity of the government to do this efficiently. Ultimately, I believe that it needs to be outsourced to independent folks who have the autonomy to act as quickly as we act in the private equity business.
*Chairman Tiberi. The gentleman’s time has expired. Anybody else want to answer that question?
*Mr. Greeff. The last thing that I would just add is we think that any time that you can create a public‑private partnership as opposed to a wholly public operation, we think that that generally works better. And we would also argue that moving the money closer to the source of the innovation increases the chances that it is going to be spent wisely. So the solutions in Louisiana are going to be different than in Ohio or Massachusetts or Georgia.
And we would say that the public‑private partnership done at a more regional, local level actually helps to increase the efficacy with which that money is distributed, and makes sure that that innovation is happening at the ground level, in conjunction with the national labs, in conjunction with the universities, and all the talent that we have in the United States.
*Mr. Larson. Thank you.
*Chairman Tiberi. Thank you. Thank you all. One last question on behalf of the panel. If you guys were up here, just a yes or no answer ‑‑ starting with Dr. Marron ‑‑ with what you know, would you vote yes or would you support or oppose the Nat Gas Act, which is our next panel? Because I am going to go to our next ‑‑
*Mr. Marron. Pass.
*Chairman Tiberi. Pass? Pass it, or pass?
*Mr. Marron. Oh, sorry. Pass on the question.
*Chairman Tiberi. Okay.
*Mr. Book. I don’t know enough until you can give me a comprehensive accounting.
*Chairman Tiberi. Stick around.
*Mr. Book. But leaning oppose.
*Chairman Tiberi. Okay.
*Mr. Auerbach. I would have to pass, I haven’t studied it closely enough. I apologize.
*Chairman Tiberi. All right.
*Mr. Coleman. I hate to say it, but I haven’t studied it closely enough, either.
*Chairman Tiberi. All right.
*Mr. Greeff. Pleading the Fifth.
*Chairman Tiberi. Pleading the Fifth?
*Mr. Greeff. I am just kidding. It is the same thing; I haven’t read the bill.
*Chairman Tiberi. You guys should stick around the for the next panel, then.
*Mr. Greeff. Might just do that.
*Chairman Tiberi. Really appreciate your testimony today. You guys did great. Gave us a lot of great information. And thank you so much for coming.
We will now seat the third panel. Our third panel today, while they get seated, I will introduce them to save a little time as the second panel departs. Very informative second panel. Again, thank you so much for coming.
We have our third and final panel with us today: Mr. Andrew Littlefair, president, chief executive officer of Clean Energy Fuels; Dr. ‑‑ oh, not ‑‑ Dr. Lawrence Lindsey is now gone, he had to leave so he was part of the second panel; our former colleague, the Honorable Congressman Calvin Dooley, president and chief executive officer of the American Chemistry Council, welcome; Dr. David Kreutzer, research fellow in energy economics and climate change of The Heritage Foundation; and finally, our last witness, I will yield to my good friend from Massachusetts, Ranking Member Neal, to allow him to introduce our final witness.
*Mr. Neal. Thank you, Mr. Chairman. I am pleased to introduce one of my constituents, Hank Ziomek, who is the director of sales for the Titeflex commercial division, with global responsibility for the automotive and industrial markets. Titeflex is headquartered in Springfield, and I must tell you it is a very neat story. We are all very proud of what has happened at Titeflex.
Before joining Titeflex, Hank spent nearly 20 years with the Dana Corporation, including as a business unit manager for the Boston weatherhead division. So it is extremely helpful to get the input of individuals like Hank, and I am appreciative of the fact that he has taken the time to come to Washington today to give us his perspective.
*Chairman Tiberi. Thank you, Mr. Neal. Thank you all for joining us. You will each have five minutes to present your testimony, and your full written testimony will be submitted for the record.
So, with that, Mr. Littlefair, we will begin with you. You are recognized.
STATEMENT OF ANDREW J. LITTLEFAIR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CLEAN ENERGY FUELS, SEAL BEACH, CALIFORNIA
*Mr. Littlefair. Thank you, Mr. Chairman. Chairman Tiberi, Chairman Boustany, and members of the committee, my name is Andrew Littlefair, and I am president and chief executive officer of Clean Energy Fuels. I am also the immediate past chairman of NGV America, a national trade association, over 120 companies involved in natural gas vehicles and related production distribution and transmission.
I am here to speak in favor of H.R. 1380, the Nat Gas Act, introduced by ‑‑ on April 6th ‑‑ by Representative John Sullivan and Congressman Larson, cosponsored by both subcommittee chairmen, along with 181 other bipartisan Members of the House. I would like to focus on the advantages to our economy of jump‑starting a natural gas vehicle industry in the United States.
The changeover from diesel to natural gas is going to make huge strides over the next 10 to 15 years. With this short‑term boost, we can accelerate that just about five years.
The benefits to natural gas as a vehicle fuel are numerous, wide‑ranging, and vital to America’s national interest. It is abundant, domestic fuel, it is a proven technology, it is cleaner than petroleum, and it will generate 400,000 new jobs over the next 5 years, and it will reduce our dependence on OPEC oil. Natural gas is one of the most abundant natural resources in America. From just a few years ago, when natural gas was considered an extremely limited resource, it is now widely believed we have enough natural gas reserves to last between 100 and 150 years.
Given the amount of natural gas, we must consider how best to deploy such a widely distributed domestic natural resource. Natural gas is a proven vehicle fuel. There are some 13.2 million natural gas vehicles operating in the world today. Globally, over 4,000 natural gas vehicles are being put on the road each and every day, and 8 new natural gas fueling stations are being opened every day.
However, of the 250 million cars and trucks and light duty trucks on America’s highways, only about 110,000 are natural gas vehicles. The argument against moving from gasoline or diesel to natural gas as a principal transportation fuel for passenger vehicles has been a matter of infrastructure. And that is why H.R. 1380 focuses on the 8 million medium and heavy‑duty trucks which burn more than 35 billion gallons of fuel each year.
Over‑the‑road trucks tend to run the same routes on a regular schedule, and we have determined that the beginnings of a nationwide network is possible with as few as only 150 natural gas stations at existing truck stops along interstate highways which can provide fuel from coast to coast and border to border.
The private sector is doing its part. Recently my company announced an investment by Chesapeake Energy to help build 150 strategically located L&G truck stops. This process, too, can be greatly speeded up through common sense incentives in the bill. H.R. 1380 takes direct aim at the incremental cost of a basic class A truck, which includes regional tractors, trucks, refuse and recycling trucks. Built to run on diesel, the base cost is approximately $125,000. A similar truck manufactured to run on natural gas today costs between $35,000 and $40,000 more.
To show how quickly the market is changing, just three years ago the incremental cost of a natural gas truck over a diesel was between $60,000 and $100,000. So we are moving in the right direction. H.R. 1380 is not a hand‑out to major corporations, grocery chains, and retailers. There are over 360,000 trucking companies in the U.S.; 82 percent of these operate 6 trucks or less, and 1 in 10 over‑the‑road truck drivers is independent, and most own their own rigs. These small businesses will retain a larger share of their earnings in the form of a tax credit to purchase natural gas trucks. And that, plus the savings of $1.50 per gallon running on natural gas instead of diesel, provides a significant life cycle reduction in cost, and will go a long way in helping to create additional demand for trucks and engines built in America.
Studies have shown that moving America’s heavy duty truck fleet from diesel to natural gas will have the effect of providing over 400,000 direct and indirect new jobs over the next 5 years throughout the NGV supply chain. Every person we hire, every position we create, has to make sense for us so it can help us make money. Yet we believe that 400,000 of new permanent, good‑paying jobs to be conservative. These jobs will be created through an anticipated private sector investment of up to $50 billion over that same 5‑year period that we are talking about with the bill.
Using domestic natural gas instead of foreign oil is also a security issue. In June 2011 we imported ‑‑ this is really staggering ‑‑ 343 million barrels of oil at a cost of $39 billion in one month alone. That is $1 million per minute every minute of every day. The cost of importing oil for the first 6 months or so this year is $227 billion, over a quarter of a trillion dollars.
A look at the list of countries in which we are sending all those dollars is chilling. After Canada and Mexico, the next largest suppliers of oil to the United States are Saudi Arabia, Venezuela, Nigeria, Iraq, Colombia, Russia, and Angola. This is not a list of countries we should be counting on for stable, fairly‑priced supplies of oil.
In converting America’s heavy‑duty truck fleet of about eight million vehicles to liquified natural gas would save 2.5 million barrels of oil per day, meaning we could reduce our alliance on OPEC oil in half. At $100 per barrel, that means $250 million per day will stay in the U.S. to circulate through our economy, rather than being shipped off to the governments of Venezuela, Saudi Arabia, and Nigeria.
Natural gas is abundant, it is available, and it is safe. Natural gas is cleaner than gasoline or diesel, produces in between 20 and 30 percent fewer greenhouse gases, and natural gas is cheaper. A typical over‑the‑road truck running on natural gas will save $40,000 per year.
*Chairman Tiberi. If you could kind of wrap it up ‑‑
*Mr. Littlefair. Thank you for your time, and attention. I am happy to answer any questions that you may have.
[The statement of Mr. Littlefair follows:]
*Chairman Tiberi. Thank you.
*Mr. Littlefair. Thank you.
*Chairman Tiberi. Congressman Dooley, you are recognized for five minutes.
STATEMENT OF CALVIN M. DOOLEY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN CHEMISTRY COUNCIL, WASHINGTON, D.C.
*Mr. Dooley. Well, thank you, and good morning, Mr. Chairman and members of the committee. I appreciate the opportunity to testify on behalf of the American Chemistry Council and our members.
Your hearing today acknowledged that the United States tax code is often used to derive energy policy and influence markets, sometimes with unintended and detrimental results. The Nat Gas Act is an example of one such proposal offered at a time when our nation can least afford it.
Most people don’t realize that natural gas is vital to the productivity of U.S. manufacturers. This is particularly true to the chemical industry, which uses natural gas both as a power source and a raw material to develop and produce everything from the packaging that keeps our food fresher longer, and to the building products that make our homes more efficient and affordable, to the parts and materials, including high‑tech composites that make our cars and planes lighter, stronger, and more fuel‑efficient.
Our products and materials are then used by other industry to create new goods on which American families, farmers, and business rely. In fact, more than 96 percent of all domestically‑manufactured goods are embraced and enabled by chemistry.
That is one reason why new supplies of natural gas from previously untapped shale deposits are such a game‑changer for our industry, and for American competitiveness. In recent months, numerous chemical manufacturers have announced new investments, thanks to the outlook for a predictable domestic natural gas market. And a recent ACC study found that reasonable increases in natural gas, on the order of about 25 percent, would result in nearly 400,000 new jobs in the chemical sector and supplier industries, generating more than 132 billion in U.S. economic output, and nearly 4.4 billion in local, state, and federal taxes, annually.
As we move to take advantage of this vast resource, we must not introduce expensive distortions into the natural gas market. The Nat Gas Act would do just that. The act aims to boost the production and use of natural gas vehicles through up to 5 billion in taxpayer‑funded subsidies. But, frankly, the bang for the buck just isn’t there. A revenue analysis by Ernst & Young conducted on our behalf estimated that the Nat Gas Act would result in about 22,000 new natural gas vehicles on the road. That is a cost to taxpayers of roughly 135,000 per vehicle, regardless of whether Congress has identified a way to pay for the bill or not.
Perhaps most troubling, though, is the bill’s potential to create an unbalanced, volatile natural gas market plagued by price spikes. A return to volatile natural gas markets similar to those of the previous decade would undermine a growing resurgence in domestic chemical industry. Data from the last 50 years show that natural gas prices go up, exports from our industry fall precipitously, and manufacturing jobs go right down with them. For example, in the last decade, in large part due to the volatility in natural gas prices, our industry lost over 120,000 jobs.
I think, though, you know, we heard testimony from Mr. Lindsey, who I have a great deal of respect, and I think in his testimony that I had the chance to read, I think it even embodies some of the most compelling arguments on why this legislation is not appropriate. In his testimony, he identified that the differential between a truck running on natural gas versus diesel, that it was ‑‑ it would generate ‑‑ in 100,000 miles it would generate a fuel savings of $57,000 for a year. That would have a payback on that conversion of only 15 months, a return on capital investment of 80 percent.
What this legislation would do, if you back up and think about it, if you look at what companies have the largest fleets in the United States, you have FedEx, you have UPS, you have Waste Management, you have the Cokes, you have the Pepsis, you have the Wal‑Marts. All of those have central fueling stations today. So we would be putting the taxpayers on the line. A good share of that $5 billion that we are going to be asking them to pay would go to companies that have the ability to have centralized fueling stations, that would go to their conversions of their heavy vehicles up to $64,000, when today the market forces would allow them to recoup a return on that investment in 15 months without a tax subsidy.
You know, as we are striving to try to get our country’s fiscal house in order, it is important for us, more than ever, to try to define the appropriate role of government. We need to allow the marketplace to work, and the marketplace is working. And Mr. Littlefair’s company is a good example. With Chesapeake, the already have announced that they are going to establish 150 natural gas fueling stations throughout the country.
Give this industry time to work. Allow the marketplace to work. Do not pick winners and choosers [sic], and do not put the taxpayers on the hook for subsidies that will create a distortion that aren’t needed at this time.
[The statement of Mr. Dooley follows:]
*Chairman Tiberi. Thank you.
Mr. Kreutzer, you are recognized for five minutes.
STATEMENT OF DAVID W. KREUTZER, RESEARCH FELLOW IN ENERGY ECONOMICS AND CLIMATE CHANGE, THE HERITAGE FOUNDATION, WASHINGTON, D.C.
*Mr. Kreutzer. Thank you very much. Chairmen Tiberi and Boustany, Ranking Members Neal and Lewis, and other members of the committees, thank you for this opportunity to address you concerning the economic consequences of subsidizing natural gas technologies. My name is David Kreutzer. I am research fellow in energy economics and climate change at The Heritage Foundation. The views I express in this testimony are my own, and should not be construed as representing any official position of The Heritage Foundation.
I would like to make several points regarding the Nat Gas Act. Among them, the act would pick winners by providing subsidies in the form of preferential financial benefits for select natural gas technologies, the act would lead to inefficient allocation of resources and lower national income, the act would not necessarily reduce variability in transportation energy prices, the act’s national security impact is muddled, and an equivalent impact on petroleum imports could be more quickly achieved by allowing access to our domestic energy supplies.
The act subsidizes preferred natural gas technologies, and should not be considered a tax cut in any meaningful sense. An example illustrates how the act picks winners and losers. Suppose a trucking company considers two options for improving its fleet. The first option is to trade in trucks for new diesel‑powered trucks at a net cost of $80,000 per truck.
The second option is to retrofit its current trucks to run on natural gas, also at a cost of $80,000 per truck. If the firm has a marginal tax rate of 35 percent, choosing the natural gas retrofit leaves the firm with 41,600 additional bottom line dollars for each truck, when compared to trading in for new diesel trucks. Natural gas is the chosen winner, diesel and gasoline power are the chosen losers.
If the preferred natural gas technologies were, in fact, more cost effective overall, there would be no need to subsidize them. This firm will choose natural gas without a subsidy. However, with a subsidy in place, the firm will choose the natural gas option even if it were $41,599 worse than the diesel option. The firm may make $41,599 less with the natural gas option, but the $41,600 subsidy leaves them with a net $1 gain. But that net $1 gain is for the firm. Unfortunately, the taxpayers must cough up the other $41,600 to cover the difference.
And this sort of incentive could lead to inefficient resource use and lower national income.
Switching to natural gas does not guarantee price stability. As chart one in my written testimony shows, natural gas prices are volatile over both the short run and the long run. For one day in February of 2003, natural gas prices tripled. Investigations determined that a cold front sweeping across the northeast after a relatively cold winter was the culprit.
I am a strong supporter of expanded use of hydraulic fracturing, which I believe to be quite safe. And natural gas prices may well stay low for a long time. But betting on continued low prices is a bet that the government shouldn’t subsidize.
If we face a security threat from funding oil exporters, the Nat Gas Act better not be anti‑terrorism plan A. Chart two in my written testimony shows the impact of cutting our petroleum imports in half. The calculations used in these projections are for the year 2035. However, the results would not be dramatically different for earlier years. A 50 percent import cut is several times larger than the impact proponents of the Nat Gas offer as a goal. However, even this larger cut, with its 10 percent reduction in exporter revenues, is not likely to scare terrorists or unfriendly regimes any time soon.
In addition, this cut on our part will lower incomes for friendly exporters, and lower the import bills for all importers. For example, in the case just described, China would see its oil import bill cut by $50 billion because of the cost that we incur.
Expanded production from domestic resources, offshore and onshore, could produce more petroleum than the Nat Gas Act proposes to save, and do so while adding revenues to the Federal Government instead of cutting them.
In summary, the Nat Gas Act would pick winners and losers by subsidizing specific natural gas technology, add inefficiency to the economy and reduce national income, not guarantee low‑cost transportation fuel, and not defund terror organizations.
I thank you for this opportunity to address the committees and look forward to your questions.
[The statement of Mr. Kreutzer follows:]
*Chairman Tiberi. Thank you.
Mr. Ziomek, you are recognized for five minutes.
STATEMENT OF HANK ZIOMEK, DIRECTOR OF SALES, TITEFLEX CORPORATION, SPRINGFIELD, MASSACHUSETTS
*Mr. Ziomek. Thank you very much, Chairman Tiberi, Ranking Member Neal, Chairman Boustany, Ranking Member Lewis, and the other members of the committee. Thank you for affording me the opportunity to come before you on behalf of the people of Titeflex in support of the Nat Gas Act.
Headquartered in Springfield, Massachusetts, Titeflex is in its 95th year of operation with locations in Springfield, Massachusetts; Vista, California; Laconia, New Hampshire. Titeflex is a subsidiary of Smiths Groups, PLC, and under the FlexTech division, Smiths Group is a world leader in the practical application of advanced technologies, and delivers products and services for threat and contraband detection, medical devices, energy, communications, and engineer devices markets worldwide.
We have a long history of supplying high‑quality fluid‑handling components for fuel, hydraulic, pneumatic systems, ranging from implant robotics, automobile brakes, to the space shuttle landing gear. Titeflex Commercial Group manufactures PTFE Teflon hose and fittings for the automotive, industrial, aerospace industries, and the leading supplier of C&G flex hoses for the natural gas vehicle market.
I come before you today to support ‑‑ in strong support ‑‑ of H.R. 1380, the Nat Gas Act. You have already heard today the facts about natural gas are clear. Natural gas is the cleanest commercially available fuel for transportation today. Domestic reserves of natural gas are estimated to be twice that of petroleum. Natural gas has been between 25 and 42 percent cheaper than diesel over the last 14 years. Ninety‑eight percent of all natural gas consumed in America is produced in North America, while sixty‑four percent of crude oil is imported.
Natural gas vehicles in use are approximately 12 million worldwide. There are only 110,000 NGVs in the United States. With appropriate government policies, use of domestic natural gas to power the nation’s trucks and buses could reach as high as 10 billion gallons per year by 2020 and displace up to 20 percent if diesel fuel. Should the Natural Gas Act pass, heavy duty haulers and fleet vehicles can immediately displace some of the foreign oil we rely on today.
For Titeflex, total sales have increased by over 50 percent over the last 2 years. That is 400 percent in the natural gas segment for us. There has also been a 12 percent increase in overall employment for Titeflex. However, in the processes related to natural gas vehicles, it has increased 41 percent. And since the tax credits were in place in 2006, our sales have increased 600 percent for natural gas vehicles.
Smiths recently also invested $4 million in the Titeflex plant, and a lot of it had to do with this market and other markets which are fast‑growing. Also employed locally over 100 people in construction and trades. And as far as new technology, we also put some very efficient new technology that were more efficient and also more environmentally friendly.
The short‑term benefits for our economy from NGV market growth are evident. The Nat Gas Act would provide the additional impetus needed to achieve the step change that will achieve ‑‑ will advance technology, lower overall cost to users, further enhance employment, and bring the United States closer to energy independence.
To close, the Natural Gas Act provides a limited five‑year program that accelerates wider adoption of this American vehicle fuel. This legislation is a real solution to our nation’s challenges. On behalf of the people of Titeflex, thank you again for affording me the opportunity to come before your committee.
[The statement of Mr. Ziomek follows:]
*Chairman Tiberi. Well, thank you all for your very good testimony.
Mr. Littlefair, you just heard Mr. Dooley talk about the fact that the marketplace is working, and that you and others are making significant investments. So why is the legislation needed? Can you tell us?
*Mr. Littlefair. Well, yes, Mr. Chairman. You know, first off, put it in context. We have seen some growth. You today have 1,500 heavy duty trucks on natural gas, and you have 8 million that are on diesel. So we think this is exactly the right place to use tax policy to spur the growth.
Now, what Mr. Dooley talked about, I think, is ‑‑ I understand that he wants cheap natural gas. And if I was running the chemical industry, I would want that too. The beauty about this today is we have enough natural gas for both, relatively reasonably‑priced natural gas for chemicals, and also moving our gas into transportation.
You know, there are winners and losers, I think, as we look at this. And the winner is domestic natural gas resource that happens to be clean, that creates jobs. And the loser is foreign, imported oil.
But I think if we will just give a little bit of a boost here, it will drive the manufacturers in to bring down the cost, and I think that we can ‑‑ what do you call it ‑‑ sunset this bill over the next few years, and I feel confident that we don’t require an ongoing long incentive.
You know, the Congress passed a version of the Nat Gas Act years ago. And I think it is very instructive. It took a while ‑‑ I think it was passed in 2006, and it took a while for it to actually get implemented through the IRS. It really hit its stride in about 2008, and at that time we really only had trash trucks. We didn’t have the engines for these big, heavy duty trucks that could really impact foreign oil. But we had trash trucks.
The first year that the tax incentive was in place, the penetration was three percent of the new trash trucks purchased in the United States. This year, this coming year, 2012, it will be 35 percent. And that tax credit is now gone, as you know. I think that is the same exact thing that you will see if we can have a few years of tax ‑‑ this doesn’t go to us, this goes, the incentive, to the trucks ‑‑ you put that in place today, you will kick‑start a huge business, moving us off of imported, dirty diesel fuel and using our own domestic fuel.
*Chairman Tiberi. Thank you. Mr. Kreutzer, you ‑‑ in your testimony you talk about the fact that national security is muddled. One of the arguments the proponents have had with respect to this bill is weaning ourselves off of foreign oil. And I am a supporter of what you talked about, expanding offshore and inland drilling for oil and natural gas.
But in addition to that, can you tell us why you believe that expanding domestic production, or domestic tax credits to ‑‑ as Mr. Lindsey said earlier ‑‑ to get the private sector over the hump of an established private sector already in the petroleum and diesel market on a temporary basis kind of muddles that national security issue?
*Mr. Kreutzer. Yes, yes. First, as the chart shows, even cutting our imports by half, 4 million barrels a day ‑‑ if we cut from 8 to 4, in 2035 the EIA projects we will import 8 million barrels ‑‑ cuts OPEC revenues from 2.3 trillion per year to 2.1. Now those are huge numbers. But I don’t know that anybody said that the terrorists get their funding from the last 10 percent.
So, I ‑‑ what I think it muddles is it takes our focus away from actual security policies that we need to implement, not pretending that cutting our oil imports a decade or two from now is going to make us safer any time soon.
Second, when you implement policies that make the economy less efficient, that reduces the robustness of the U.S. and its economy and its ability to support a military. So that is my only thing.
There are lots of questions about who should support the transportation lines for oil. Why is it the U.S. instead of the Persian Gulf nations, and so on? And I don’t have the expertise to talk about that. And those may be great questions. But would cutting our imports by 2.5 million barrels a day eliminate the need for the Navy? We had a tremendous amount of money that we spent countering the Soviet Union’s military might, and we got nothing from them. We imported zero.
*Chairman Tiberi. Okay.
*Mr. Kreutzer. Yes, okay.
*Chairman Tiberi. Last question. If all of you could, answer this question.
We have heard from the other panel, we have heard about not all tax credits are created equally. Using different kinds of metrics with respect to tax credits and overall tax reform, I think everybody has agreed to reduce the number of credits, reduce the number of tax breaks across the board.
Starting on this side if you care to answer it, and then moving down the line, what makes the Nat Gas Act different, in terms of those metrics, in terms of job creation, in terms of energy security, in terms of cheaper natural gas for vehicles versus what we have on the books today?
*Mr. Ziomek. Well, from the basic sense of looking at this tax credit, looking at natural gas as a fuel, in general, you have a situation where the rest of the world has supported this technology, and the United States has not. Why is that?
Every nation, almost bar none, supported it with a tax policy, including Venezuela, that had abundant oil and decided, well, it is cheaper, it is much more profitable for us to export the oil, and we are going to have our citizens use natural gas. So they incentivized them to use natural gas. And this has happened in a lot of other areas, as well.
But the bottom line is we have pretty much not supported the natural gas part of our economy, and we have plenty of it. It is something that we produce here, and it is something that will allow us to grow faster. And what you need, why the tax policy is important, is we need to have this change.
We need to take the curve from where we are today to ‑‑ like a hockey stick. We need to move the technology faster, we need to get that money to people in manufacturing, particularly, who can invent new things, who can lower the cost of all the equipment that is put into this economy of the natural gas vehicles. And it is happening, but we need to have it happen faster so that we can compete. Bangladesh thinks we are an opportunity for growth for them to sell their products here. We are that far behind when it comes to technology in that area.
*Chairman Tiberi. Mr. Kreutzer, you might have a different view?
*Mr. Kreutzer. Yes, I do. If it comes to choosing ‑‑ guiding our policies according to what Hugo Chavez in Venezuela does or what American markets choose, I am going with American markets, no questions asked.
But getting back to your question of how does this differ, I don’t think it does. I think this is a tax credit subsidy scheme, like many others we have, that needs to be simplified. We need to weed those out, get down to a simpler tax structure. And this is going in the wrong direction.
I would like to say I am not against natural gas. I am not against shifting the trucks over. But I think ‑‑ I don’t know, and I don’t think anybody here actually knows ‑‑ all of the costs that all of the trucking companies have to go through and the trade‑offs they have to make. And it is for them to decide. I fully believe if the numbers are as they said with Congressman Dooley, Coca Cola, FedEx, all those companies will switch over. There is not a chicken and egg problem here. Thank you.
*Chairman Tiberi. Congressman Dooley?
*Mr. Dooley. Yes, I would respond in this manner, is that, you know, I think, you know, it really is your charge to really define what the appropriate role of government is. And how can you allocate the resources, which are taxpayer resources, in a way that achieves societal or economic objectives?
Mr. Littlefair talked about in 2006 that there was a tax credit to try to encourage natural gas vehicles. You know what the price of natural gas was in 2006, 2007? It spiked up to $12 and sometimes $14 an MMBtu. It is $4 today. Now, from a policy‑maker’s standpoint, you can make ‑‑ you have to question. Are the circumstances the same that you need a tax credit today when the fundamental driver is much different, in terms of the price of natural gas? And I would suggest no.
And that is where I go back. Do you want to tell your constituency out there that Congress is enacting a taxpayer subsidy that, by our calculations that were done by Ernst & Young ‑‑ and we would be more than pleased to share with you ‑‑ amounts to about 137,000 per vehicle that is converted. Do you want to tell your constituents that you are supporting a tax subsidy for the conversion of a vehicle that if the private sector, where the market forces are in place today, if they made that investment on their own they would get an 80 percent return on that investment for that conversion without any tax subsidy? And I suggest they would say no, that is not the appropriate role of government.
And so, I contend we are all for natural gas. We want them to be successful. We want a domestic energy policy that enhances our domestic security. But this isn’t the policy that is going to achieve that, and it is going to be one that creates distortions in the marketplace.
*Chairman Tiberi. Thank you. Mr. Littlefair?
*Mr. Littlefair. Well, what we hear from a couple of my fellow panelists, “We want the status quo.” And I think when you go home and you talk to your constituents, I think the real question is, “Do you want to continue to import oil from people that don’t like us,” or should you do something, use your tax policy to create jobs?
And I think that this is a unique position in history. Yes, it is because it is cheap, because we have so much of it. That is why all your factories are using all the natural gas right now. But we are in a unique position to be able to move our country away and create jobs. And only natural gas can really do that. That is the truth here, is that we only really have one resource that can make this kind of bold shift. And in order to move it, I think we are talking about a very modest tax policy. And so I think it is a unique opportunity that you don’t have in hardly anyplace else.
*Chairman Tiberi. Thank you. Thank you. Thank you all. Mr. Neal is recognized.
*Mr. Neal. Thank you, Mr. Chairman. Hank, certainly the priority here, as you have expressed it and the other panelists have expressed it in different ways, is to create more jobs. And could you spend a couple of minutes talking about what has happened at Titeflex, given the use of the Natural Gas Act?
And because the issue has been raised by other panelists, why you think that keeping the credit for only a handful of more years, five more years, is necessary. So we are talking, I believe, from your perspective, sunsetting the credit down the road. Could you respond?
*Mr. Ziomek. Well, I think that right away the evidence for us is very clear. We have been engaged in this market for quite some time. Since the credits were established, that market has accelerated tremendously for us. We have made decisions, including $4 million in a plant renovation, some advanced technology that is ‑‑ environmental technology for one of our processes. We have also now done some innovation in the process of making the hose that goes into this market based on the future growth we anticipate. And we believe this kind of credit is going to allow that growth to happen.
In fact, we are counting on this type of policy in the government to allow that ‑‑ as I said before ‑‑ this leap forward, so that we can continue to advance technology in our own business. Like I said, we have increased our employment in Springfield. I mean Massachusetts, manufacturing has been beat, beat to heck in Massachusetts. And we have had some winners there, but we have had more people leaving Massachusetts.
So, to be able to do this, there had to be some technological improvements. There had to be something that we do that no one else can do in the world. And this kind of policy is allowing us to grow in that area, where we do have advanced technology in our product. And that is for the support of natural gas vehicles.
And the five‑year ‑‑ the reason you only need five years is if you could get that infusion, you get that hockey stick, you have advanced far enough that you have a competitive market. We are not asking you to support this for the rest of our business lives. We are asking for a fairly short period of time here. And bottom line is I think it will be even more ‑‑ it will be faster than that, and you will find that the jobs are going to multiply, based on this policy.
*Mr. Neal. For you and for Mr. Littlefair, the Natural Gas Vehicle America has suggested that there are 12 million natural gas vehicles on the road, worldwide, and only 110,000 of them can be found in the United States. We are ranked 16th in the world, as far as natural gas vehicle deployment, behind countries such as India, China, and Bangladesh. Why?
*Mr. Littlefair. Well, part of the reason is some of those countries have put in place incentives to encourage it because they are importing oil, much like we do, and so they have natural gas and they want to move to natural gas vehicles. And we have certainly seen that in China, and we are seeing it ‑‑ and China has just adopted a policy to build 4,000 natural gas vehicles and put in an L&G truck corridor. And we are selling equipment in China right now, natural gas fueling stations, and they are going at it, big time. So ‑‑ and that is what is happening in South America. I mean Peru is doing the same thing.
I mean we look like the odd man out. And it didn’t happen here for a long time, because we had cheap oil. Well, we don’t have cheap oil any more. And so they have put in place tax policy to move the industry along.
*Mr. Neal. Hank, do you want to comment to that?
*Mr. Ziomek. Well, I agree. Again, what I said earlier about what happened in Venezuela, I know Hugo Chavez is a different person in the way we look at that, but if you look at all the countries in South America, every one of them put tax policy in place to drive their people to want to use natural gas. It is more environmentally responsible, and it also is cheaper for them, because it is more accessible. And now we are finding out, here in the United States, natural gas is probably way more accessible to us than oil.
So, to me, it is kind of like ‑‑ I have had a couple of people in your bodies, both Senate and House over the last couple of years ‑‑ it is a no‑brainer. That is the way I look at it. And it is going to advance employment.
The other thing is we have to understand. By us being able to advance the technologies into this market, just like we have done in so many ‑‑ aerospace, I mean the space shuttle, yes, okay, you can call that a big WPA project like somebody told me once, but that was ‑‑ we needed that kind of a catalyst to get the kind of technologies to go to space.
The same thing is true in an economy like this. We are developing new things. And we are just a hose manufacturer. Just imagine what is happening with tanks and valves, and everything else.
So, bottom line is we just need that five years to get this thing going.
*Mr. Neal. Thank you.
*Chairman Tiberi. Dr. Boustany is recognized for five minutes.
*Chairman Boustany. Thank you, Mr. Chairman. I come from Louisiana, and my congressional district is on the Gulf Coast. And we are a leader in oil and gas production, we have got lots of pipelines, the Henry Hub, where gas prices are set for the market, I’ve got one of the largest strategic petroleum reserves in my district. So it goes on and on.
In fact, in 2005, the newest L&G facility in the country was built in my district. And now they are retrofitting, planning a retrofit to export natural gas, which we would have never thought this, five years ago.
And it is interesting, with the shale plays that have come online, now five shale plays, which not only hold the potential for gas, natural gas, but also for oil, we are seeing sort of a shifting environment with regard to our energy security in this country. And it is exceedingly frustrating to me to see that we don’t have a strategy, going forward, for our country on energy security and to move us forward.
And I think all of you were here ‑‑ I am not sure with the previous panel ‑‑ but when I made my comments I said, you know, I want tax reform, I want to clean up this tax code and simplify it. But at some point you have to make a decision, how do you move the ball forward and jumpstart the movement in the right direction for an energy strategy for this country, which means we have to have a transition.
First, don’t punish your current energy production. And, Mr. Kreutzer, I share your sentiments about expanding the access to our reserves, not increasing taxes, getting rid of this de facto moratorium on drilling, and in fact, a moratorium on areas that are currently off limits. We could do a lot for our country if we were to do all these things.
So, I have a question. Mr. Kreutzer, I saw that chart looking at the volatility of prices. And at the very tail end it seems to be smoothing out a bit. We don’t know what is going to happen. But with all the shale plays coming on, and everything else, I suspect ‑‑ and given what these L&G guys are going to do in planning exports ‑‑ that we should see some price stability. But we don’t know that.
And so, are you aware of any studies, analyses projecting what is going to happen with natural gas prices in this country? And I would ask the same question to my friend, Congressman Dooley, as well.
*Mr. Kreutzer. Well, the Energy Information Administration certainly makes their projections regularly, and they have been dramatically revising them because of the hydro‑fracturing giving access to the shale gas. But they are also maybe revise them back a little bit because the USGS came out with their estimates of the likely natural gas reserves that are available.
And I am not the geologist or the engineer. I am fully willing to believe we are going to have low natural gas prices that some of these experts tell us. That argues against needing subsidies to get people to shift over.
I would also just briefly ‑‑ because we are talking about energy independence and security ‑‑ a previous panel member said he absolutely didn’t think under anybody’s lifetime, his grandchildren, we would have energy independence. And that is a bet that I might have gone with him a couple of years ago. But they have just found 20 billion barrels of petroleum and natural gas in Ohio. We are going to get three million barrels a day from resources in Texas that we didn’t think we were going to get anything from.
So, it is not inconceivable that just without any strategy ‑‑ this is the markets working, looking to find this stuff, getting access right now on private lands ‑‑ if we could get it on public, make it even better ‑‑ that we are getting lower prices, access to more energy of conventional types.
*Chairman Boustany. Thank you. Congressman Dooley, I have a lot of refineries in my district, as you are probably well aware. And I certainly do have that concern about what is going to happen with prices, and what is the impact on our energy, whether you are talking about upstream, downstream, and so forth.
So, are you aware of any analyses projecting the concern you expressed with regard to natural gas prices? And could you provide those analyses to the committee?
*Mr. Dooley. Let me respond this way, is that we are not, as an industry ‑‑ I mean we are not ‑‑ it is not that we are for cheap natural gas. We are for competitively priced natural gas, and however you define that. And we are in a situation now where we are coming off a decade where we had great volatility in natural gas. And that is what, in large part, drove a lot of the chemical industry outside the United States.
We have moved in the last ‑‑ if you look at the five years, if you looked at a cost curve, five years ago the U.S. chemical industry was a high‑cost producer. We were more expensive than even Western Europe. We compete with the rest of the chemical industry globally. They are primarily NAFTA‑based, which is oil based. The break‑even point for us was about one to six, with gas to oil. So when you had a $24 barrel of oil, we would have $4 gas. We would be in relative equilibrium. We didn’t have that, and that is why we were at the high cost.
Now we have a distinct advantage, and that is why you have our companies lined up to invest billions and billions of dollars in new capacity. But what we are concerned about is not solely about the market distorting and picking winners in the Nat Gas Act. If you look since 2000, power generation shifting from coal to natural gas has increased by 42 percent. Last year it was by seven percent.
Now, we have a lot of promise. I was in Ohio yesterday at Governor Kasich’s energy summit, touting the potential of the Utica and the Marcellus shale. There is ‑‑ a lot of this natural gas isn’t out of the ground yet, and we are making some of these projections. There is a lot of public opposition to how you can bring that out.
So, we are kind of looking at what are all the uncertainties that are out there. There is the regulatory uncertainty in order to capitalize on all this natural gas. There is also market uncertainty, because of regulatory policies that might have even a more rapid shift from coal‑based generation to natural gas, and then we overlay another tax policy that drives demand for natural gas through tax subsidies, and that is what is our concern here.
*Chairman Boustany. No, I appreciate that, because I am certainly concerned about our competitiveness, especially with the chemical industry in my state, and it is our second largest export, and we are fourth in exports among the 50 states right now.
So ‑‑ but if you have data, or an analysis, I would love for you to share ‑‑
*Mr. Dooley. Yes. No, we will ‑‑ and you have been ‑‑ we appreciate the openness of your office, and we will provide that information.
*Chairman Boustany. Thank you, sir.
*Chairman Tiberi. The gentleman’s time has expired. But Mr. Littlefair, you had a comment, I could ‑‑
*Mr. Littlefair. Well, I was just going to say ‑‑ and I don’t have it right here in front of me ‑‑ but, Congressman, if you look at the 10‑year strip price ‑‑ and the former congressman knows this ‑‑ I mean you have pretty low natural gas prices. I don’t know if it ticks up ‑‑ I don’t believe it hits $6. I think you go out 10 years and it is $5. And so you are going to have, I believe, long, stable, relatively cheap natural gas prices.
*Chairman Tiberi. Mr. Lewis is recognized for five minutes.
*Mr. Lewis. Thank you very much, Mr. Chairman. Thank you for being here. Good to see you, Congressman Dooley, again. Welcome.
I have a question for each member of the panel. As a member of the Oversight Subcommittee, I am always concerned with how we administer tax policy. Our subcommittee works hard to make sure that government has the necessary tools to detect fraud and abuse of taxpayers’ dollars. Could you tell me what kind of documentation you think the IRS service should use to verify peoples’ claims for deduction under the Nat Gas Act?
*Mr. Littlefair. I am not an expert, Congressman, on this, though ‑‑
*Mr. Lewis. Just try.
*Mr. Littlefair. A lot of our customers have, until they expired. So when a trucking company in the port of Los Angeles buys a truck, they basically provide the bill of sale, and that is what they use to verify that they have paid an incremental cost, and they submit that to the IRS. Same with fuel. So it is very similar to the fuel credits, very similar to what goes on today. You make that available to the IRS, and they can audit it if they don’t believe you.
So I don’t think we have a very complicated way to monitor the effectiveness and the distribution of the tax incentive. In what I have seen it is through the sale of the vehicle, and it is through the sale of the fuel.
*Mr. Lewis. Any of you want to respond?
*Mr. Dooley. Yes, I would just ‑‑
*Mr. Lewis. Is there another recommendation you would have?
*Mr. Dooley. I would just suggest you could eliminate that as a concern by not passing the Nat Gas Act.
*Mr. Lewis. Oh. Wouldn’t you consider that the easy way out?
*Mr. Kreutzer. I guess not quite as jovial, I was going to suggest ‑‑ yes, when you make the tax system more complicated, it makes compliance, honest compliance, more difficult and evasive activities easier. So the simpler the tax structure is, the better compliance we will have. The Nat Gas Act adds a lot of complexity for just a few pages. It is amazing. And in my testimony, my written testimony, I copied just one section, which is gibberish to most anybody.
*Mr. Ziomek. From my perspective, since we are really what we call tier two, we are way down the chain, as far as the customer. But as Mr. Littlefair said, it is with the purchase of the vehicle, they provide a receipt, and that is the way this is being paid for. I think it is pretty straightforward. I don’t ‑‑ I cannot profess to give you any more information on that, because I am not that close to that end of the curve here.
So, my position is that it is very straightforward. You buy a vehicle, you submit the receipt, and that is how you get the credit. Thank you.
*Mr. Lewis. I asked the panel just before you a basic question, and I would like to hear your thoughts on this same question. In these tough economic times, more and more people are saying we want to reduce the deficit. Many of them would prefer we do it by making deep and severe budget cuts. With this in mind, please answer the question for us.
Do you believe the Federal Government has a role ‑‑ and I mean not just a role, but a meaningful role ‑‑ in accelerating the adoption of these renewable energy technologies? Why or why not?
*Mr. Littlefair. Congressman, I do. I look at the role of Congress ‑‑ and I think one of the most important roles you have is to provide for the national security for the country. And I don’t think anybody here today would say that energy ‑‑ the reason we are talking about it is because energy is key to that security.
And so, I think you do have a role to do it, and I think the tax policy is a perfectly legitimate way to go about it.
*Mr. Dooley. My response would be ‑‑ is that our industry is one of the most innovative in the country. A lot of people don’t realize, but the chemical industry has issued more patents than any other sector in our economy, about 1 out of 10 patents. We benefit by broad‑based tax policies that encourage, you know, investment in R&D. So the R&D tax credit, which is ‑‑ doesn’t pick winners and losers, is across the board, is something that we think is very important.
*Mr. Lewis. I don’t want to cut you off, but my time is running out. But with the Nat Gas Act, do you believe that we would be picking winners and losers?
*Mr. Dooley. Absolutely. And ‑‑
*Mr. Lewis. Do you believe we would be picking winners and losers?
*Mr. Dooley. Absolutely, in terms of consumers. And, you know, prior to joining the American Chemistry Council I was part of, you know, the Grocery Manufacturers. And we were concerned there, with our ethanol policy picking winners and losers ‑‑
*Mr. Lewis. Let me just ‑‑
*Mr. Dooley. ‑‑ among consumers there.
*Mr. Lewis. You know I come from a city like Atlanta. And when I am driving my own car, moving around the city, I see so many trucks: Coca Cola, UPS, Federal Express, and many others. I even see buses, part of our transit, saying, “This vehicle is operated by natural gas.” So seem like there is a movement.
*Mr. Dooley. Absolutely.
*Mr. Lewis. There is a movement. So how do we catch up with this movement?
*Mr. Dooley. The movement is even ‑‑
*Mr. Lewis. It is natural ‑‑ it is cleaner, isn’t it?
*Mr. Littlefair. Absolutely.
*Mr. Dooley. Yes. And, Congressman Lewis, what I would say is the movement is going to accelerate. It is going to accelerate ‑‑
*Mr. Lewis. Should we be part of the acceleration? Should we be left behind?
*Mr. Dooley. We ‑‑ you know, it is ‑‑ our position is that when you have the market forces at work now, when we both would acknowledge that you are going to have relatively sustained, competitively priced natural gas, maybe in that $6 range, you are going to continue to see market forces encourage the conversion of fleets to natural gas. You don’t need a tax subsidy to accelerate that at this time. It is not needed.
And it does pick winners and losers. When I am competing ‑‑ my member companies are competing for a product, and they ‑‑ you are enhancing, through tax policy, increased demand that increases ‑‑ it is going to have an impact, to some degree, on increasing the price of that product, that works to the detriment of those folks that aren’t benefitting from that tax subsidy. And that is what we conclude is picking winners and losers.
*Mr. Lewis. Thank you, Mr. Chairman.
*Chairman Tiberi. The gentleman’s time has expired. The gentlelady from Kansas is recognized.
*Ms. Jenkins. Thank you, Mr. Chairman. Thank you all for being here.
As today’s testimony points out, the cost of operating on natural gas is significantly cheaper, when compared to diesel fuel, about 40 percent cheaper on a per‑gallon equivalent. With the price of diesel at $4 per gallon, this translates into an annual savings of $60,000, or roughly the same amount as the tax credits proposed by this legislation. And I believe, as Congressman Dooley has already pointed out, the savings can be covered in less than 15 months.
So, it seems to me that the certainty the market needs is that of supply. While we have an abundant domestic resource in natural gas, it is under constant threat of halting or significantly curbing its production. So, Congressman Dooley, I have just a few questions for you in that regard.
Would that certainty, together with the tremendous fuel savings, provide the market incentive to shift investments toward natural gas? And does this legislation do anything to ensure that we would have access to our natural gas? And finally, can you elaborate on what tax credits and other incentives currently exist for installing natural gas fuel infrastructure?
*Mr. Dooley. There was a lot of questions in there, but let me respond that, no, I don’t think there is anything in this legislation that has any impact on encouraging the development of natural gas supplies and the production of it. And I think that is what we think, in terms of ‑‑ you know, I personally think we are poised in an era that we are going to see a renaissance in manufacturing. But that renaissance is going to have to be built upon a foundation of a sound, comprehensive energy policy.
Whether it was Congressman Kind or ‑‑ I think it was a congressman as well that said, “All of the above.” It needs to be ‑‑ I mean we have, basically, from our industry’s perspective, you know, we are an energy‑rich nation. We have chosen to make ourselves, you know, in some ways, dependent on imported oil because of our regulatory policies put in place, and those energy resources that we have put off limits. And that is why we are so excited about the shale gas and the natural gas supplies, and are committed to developing those regulatory policies that fully allow us to access those supplies.
And this is where we have the benefit of not having to have a policy now to encourage the use of natural gas, because the marketplace is dictating that that is a good choice.
*Ms. Jenkins. Okay, that is fair enough. Thank you. Switching gears a bit, Congressman Dooley, I am sure everybody is aware the cost of fertilizer depends primarily on the price of natural gas, and natural gas costs represent between 70 to 90 percent of the cost of producing ammonia, the building block of nitrogen fertilizers. And being from a farm state, Kansas, I am concerned about family farmers getting hit on both sides, one with decreasing support for agriculture programs, and also seeing a dramatic rise on their input costs.
While seemingly a small issue, an affordable supply of natural gas is very important to the fertilizer industry, and on which 60 percent of the world’s food supply also relies. Forecasts for 2011 show that fertilizer costs for wheat were up 30 percent from the 2010 levels. The last time we saw a spike in natural gas prices, over two dozen ammonia plants in the U.S. were forced to close their doors.
So, as someone familiar with the industry, Congressman Dooley, again, would you mind talking just a bit about your concerns regarding demand for natural gas on the ag industry?
*Mr. Dooley. Well, prior to coming to Congress, I would even have had greater concerns, because I was a farmer in the Central Valley of California. And so now it is my family that is still operating the farm that is concerned about the ability to access, again, affordable fertilizers, particularly NH‑3 ammonia, which is obviously an integral component to the production of many crops.
And so, you know, this again is ‑‑ you know, we are looking at not only an enhanced global competitive situation for the chemical industry, but also for our United States farmers, because of the ability to access natural gas at a price that looks, for the foreseeable future, to be very affordable and competitively priced. And that is why we have become very concerned ‑‑ the fertilizer manufacturers and farmers, as well as chemical manufacturers ‑‑ when we see Congress considering policies that are going to increase demand through tax policies or regulatory policies that will then drive up prices.
And so, you know, we would ‑‑ the fertilizer and a lot of the farm industry would share some of our concerns, again, about this interference in the marketplace that create market distortions that result in some constituencies benefitting over the expense of others.
*Ms. Jenkins. Okay, thank you. I yield back.
*Chairman Tiberi. Thank you. The gentleman from Connecticut is recognized for five minutes.
*Mr. Larson. Thank you, Mr. Chairman, and thank you again for holding this hearing. And I want to thank our panelists, and I especially want to welcome my old friend and dear colleague, Cal Dooley. While I might not agree with everything that he said, I am glad that he is here, participating. In fact, all the panelists have done an extraordinary job, and I commend the chair and the ranking members for creating this kind of opportunity.
I am ‑‑ would have to say that I am more of a student of Thomas Friedman than I am of Milton Friedman as we get ‑‑ evolve into these discussions. But I do think, at the heart of this, is something that is vitally important to the Congress.
The winner here actually, if you talk about picking winners, was Mother Nature. She happened to create, in this instance, an opportunity for us to capitalize on. And to capitalize in on a time, frankly, when it has been very difficult for Congress to act at all. Again, I am very proud of the fact that there are 180 cosponsors of this bill, and growing. And why? Because Congress does need to act. Yes, we would all love to have a comprehensive energy policy. Yes, we would all love to have comprehensive tax policy. The fact of the matter is we don’t.
But where are we in agreement on? We are in agreement on the critical issues before us, as it relates to foreign policy that happens to be coupled by an environmental benefit, an economic benefit, in terms of jobs that we have heard about, and also in terms of an energy benefit. Finally we have a source that is abundant, accessible, and it is ours.
And so, we have this enormous advantage. I agree with Cal Dooley. We are going to see the opportunity for an industrial renaissance. So, as other countries gather strategically and are looking to eat our lunch, shouldn’t we be doing everything within our power to gain the advantage, recapture that industrial base, augment what we have already, and provide the opportunity to move forward?
Friedman points out ‑‑ Thomas, not Milton ‑‑ that what we are doing here is exporting our dollars abroad, sending our money to fund the very countries and nations that are attacking our troops. It becomes a subsidy that is unthinkable, and consequences that we will live with for a number of years.
And so, that becomes the rallying point, and also a point that Mr. Pickens has made testifying before this committee. The United States currently in negotiations globally, as it impacts everything, is on the outside looking in. It is time to put the United States back at the center of these discussions and negotiations that transpire globally. And that is why I think that it is so important.
But I do think two things have to be underscored. And Mr. Littlefair, I would ask you to again review. In terms of national security and reducing our dependance on foreign oil, how much foreign oil would be displaced if the Natural Gas Act passed?
*Mr. Littlefair. Well, Congressman, over time we believe ‑‑ as you know, over 5 years, we think you will be on your way to 100,000 vehicles ‑‑ actually, about 150,000 vehicles in the fifth year. But that is going to set you up to a point where you would be able to reduce Middle Eastern OPEC oil by 50 percent, which is about 2.5 million barrels a day. So it is significant.
It doesn’t make ‑‑ the real answer to ‑‑ the question on the earlier panel was can we be energy independent. I don’t think you can be energy independent. Nobody else on that panel. But you can sure go a long way to make sure you are back at the table, and reduce your dependence. And so, reducing OPEC by 50 percent is a hell of a first step.
*Mr. Larson. And the other aspect of this, with 14 million Americans unemployed, the jobs here that you discussed. What is the jobs ‑‑ what are the jobs that you see immediately available? And then long term ‑‑ all the panelists ‑‑
*Mr. Littlefair. Sure. The ones that I have here ‑‑ and I have them right in front of me, Congressman ‑‑ direct jobs. And I know our company is building things right now, we are spending millions and millions of dollars, and we are hiring people. In the 5 years you get 100,000 direct jobs. That will happen in the first 2 years, 27,000 jobs in vehicle fuel system, hardware installation, production of fuel stations, production of plants. And then you get, you know, about 330,000 indirect jobs.
I am not even counting what happens in the oil patch and in the gas patch. I am talking about, really, fueling stations and vehicles and the money that is spent. It is really breathtaking. I don’t think there are that many kinds of deals out there before Congress right now that can generate that kind of jobs.
*Mr. Larson. And is there any other source of energy that can get us there?
*Mr. Littlefair. No. And that is the other thing. You know, I sit here and get a little frustrated because I ‑‑ look, I want there to be cheap gas for chemicals, and I want cheap gas for a fertilizer plant. But, you know, that assumes that we are just going to continue to import foreign oil. And we kind of act like that is fine, you know, let the market worry about that. Sixty‑three percent of our foreign oil every day is being imported ‑‑ or oil is being imported every day, and seventy percent of that goes to transportation.
We now are the world’s ‑‑ you know, we have three times the amount of ‑‑ if you take our natural gas today and convert it in oil, we have three times the amount of oil as Saudi Arabia does. And here, we are not doing anything about it. We are going to talk about exporting our natural gas. Now, wouldn’t that be something? Export our natural gas and import more oil?
*Chairman Tiberi. The gentleman’s time has expired. If anyone in the room doesn’t know what your position is, Mr. Larson, I think they probably know objectively where you are on this piece of legislation.
*Chairman Tiberi. The gentleman from New York is recognized for five minutes.
*Mr. Reed. Thank you very much, Mr. Chairman, and I am glad to hear my colleague on the other side of the aisle join me in support of natural gas development in a clean and responsible way. And that is my question to this panel.
You know, I come at this from a cosponsor to this act. I come at this from the founder of the Marcellus Shale Caucus in Congress. And I do believe that this shale development is a game changer when it comes to our energy policy. And so I was intrigued, and I am very excited to hear the immediate response to Mr. Lewis’s question about this is a clean energy. I heard yes, yes, yes, yes, immediately.
Yet there are some people that are out there that have indicated that, with hydrofracking and other issues and concerns, that it is not a clean energy, and that there are significant risks with it. Would anybody care to respond to the criticisms of exploring natural gas because of the environmental concerns about it?
I guess, Mr. Kreutzer, you have ‑‑
*Mr. Kreutzer. No, I have said I would fully support hydrofracking. I think it is safe. I hope they go forward with it. But that is different than saying I think we should subsidize users of natural gas.
*Mr. Reed. Understood.
*Mr. Kreutzer. We wouldn’t have the hydrofracking if we depended entirely on government policies to run our energy policy ‑‑ run our energy markets.
Hydro fracturing technology was developed by George Mitchell at Mitchell Energy using his own money, no government subsidies. And so we didn’t need an energy policy to get this huge increase in domestic energy. And that is why I support markets.
*Mr. Reed. Yes. And I understand that point, and that is why I am kind of deviating, because all the good questions ‑‑ when you go last, all the good questions are taken before you get an opportunity to ask the questions.
*Mr. Reed. So I am kind of deviating from the jurisdiction of this committee, because I do see a concern, or a potential barrier to the positive development of this resource that is floating out there.
I hear the director of the EPA, Ms. Jackson, talk about hydrofracking and how she is going to try to get at it and regulate it at the federal level. Are there any concerns coming from any of the panelists as to any other threats to the potential development of natural gas, outside of the tax disagreement?
*Mr. Dooley. No, and that is where I made a statement earlier, is that we are making a lot of projections on a energy resource that is still in the ground, by and large. And we do have some concerns about the regulatory impediments that could develop and emerge that could preclude our ability to really develop this resource. You know, EPA is involved in a study, you know, and we hope that that will come out and will demonstrate, as the industry has great confidence, that we can extract this resource in a very environmentally‑responsible manner.
But we are also concerned, as an industry, when we are seeing local municipalities that are implementing more of land use restrictions that have the potential to impede the development of this resource. And there is obviously some questions on the constitutionality of some of those.
But you know, the regulatory arena here is not entirely clear yet, which gives some uncertainty in terms of the ability to have the great confidence in the long‑term supplies that we can actually transform into the chemicals that are critical to the entire manufacturing sector.
*Mr. Reed. Excellent. With that, Chairman, I will yield back.
*Chairman Tiberi. Thank you. This has been a fabulous panel. We thank the four of you for your time today, and for waiting until now to give your testimony.
This concludes today’s hearing. Please be advised that Members may submit written questions to the witnesses. Those questions and the witnesses’ answers will be made part of the official record. I would like to thank the participants of all three panels today for appearing. It has been a great discussion on energy ta
Thank you so much. This hearing is concluded.
[Whereupon, at 1:28 p.m. the subcommittees were adjourned.]
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