Sunburned by Corporate Welfare

by John-David Nako

The phrase “corporate welfare” usually leads people to clench their pocketbooks a little bit tighter. However, give the right incentives and those who oppose corporate welfare in principle can be persuaded to open up pocketbooks a bit wider.

Recently, solar tax credits have been advocated for under the guise of costless, risk-free economic benefits to everyone, not just panel buyers. Despite these claims, these initiatives are simply corporate welfare under a different name and should be opposed for both moral and economic reasons.

Private Gains, Public Costs

Steve Jobs once said “A lot of times, people don’t know what they want until you show it to them.” Out of this philosophy came revolutionary products such as the iMac, iPod, iPhone, and iPad. Possibly seeking to emulate the late Job’s approach, government has been trying its hand in predicting the industries of the future.

The difference is public errors come at the taxpayer's expense and government hasn’t exactly been a prudent investor (see Solyndra and the electric car experiment). The state has offered solar credits since 1976 and renewable energy proponents are quick to tout the industry’s great technological advances, but in 2010 solar energy accounted for just 1.3% of primary energy consumption.

If a private business makes a major error, it loses investors and may even go bankrupt. If government makes one, it takes money from the productive sectors to try again. The housing bubble that triggered the financial crisis was built by overlending and irresponsible practices on the parts of both government and the private sector. During his State of the State address in January, Governor Abercrombie alluded to legitimate concerns about solar tax credit benefits going primarily to the wealthy. His solution: provide easy credit for the financially unqualified as well. See the pattern yet?

Unintentional Consequences

The costs incurred by this manifestation of corporate welfare are manifold. Some of the costs are highly visible. A recent UHERO study estimated solar photovoltaic (PV) tax credits could cost the state up to $1.4B for residential units alone. Perhaps this figure is a bit lofty as it assumes all single-family residences install enough PV to become net-zero users of electricity. Still, the direct costs will be considerable− tax credits grew five-fold between 2010-2012 to $173.8 million.

Other costs are subtler. We see the solar industry that is being stimulated and the shiny panels put on homes accounting for an ever-larger share of construction projects, but we don’t see the taxpayers and industries that suffer. We don’t see the lost savings and misallocated credit that would have gone towards tourism jobs and entrepreneurial ventures. We also don’t yet see the extra costs consumers and businesses will have to pay to maintain a base-load technology grid (designed to run continuously) to meet reserve demand. After all, there are cloudy days even in Hawaii.

By pushing present consumption, the tax credit also crowds out future consumption. If, in a couple years, technological advancement led to a 50% capacity increase for PV, would the state allow the claiming of new credit in order to replace outdated panels? This would be like giving people new cars for a fuel efficiency increase.

With an abundance of natural resources, Hawaii can be a great marketplace for renewables and solar energy investments may indeed be sensible for many individuals. But why not let consumers and creditors use the information delivered through the price system to decide on their own accord, rather than distorting market signals and artificially propping up a particular industry?

If the solar market is ready to boom, simply let it stand on its own accord. Government should not partake in the picking of winners and losers on the backs of taxpayers. When left alone investors will bear private risks and also tend to allocate capital more efficiently. Policies such as the unaffordable and unjustifiable solar tax credits turn the expression “the price of living in paradise” into a self-fulfilling prophecy.

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John-David Nako is a public policy research intern for a think tank in Washington, DC and a Hawaii state resident.