All Those Snobbish Tax Credits

By Bill Moore

Posted: 01 Aug 2010

If politicians have a favorite tool for promoting various sectors of the economy while responding to constituent demands; it is the tax credit. It's used everywhere, by just about everybody. There are tax credits available for the super rich, the very rich, the rich middle class, the average working stiff, and the just-barely-scraping-by-folks. Here's sample of tax credits available just in the state of Maryland:

Bio-Heating Oil Tax Credit
Biotechnology Investment Incentive Tax Credit
Businesses that Create New Jobs Credit
Cellulosic Ethanol Technology Research and Development Tax Credit
Clean Energy Incentive Tax Credit
Commuter Tax Credit
Community Investment Tax Credit
Employer-Provided Long-Term Care Insurance Credit
Employment Opportunity Tax Credit
Enterprise Zone Tax Credit
Green Building Tax Credit
Heritage Structure Rehabilitation Tax Credit
Job Creation and Recovery Tax Credit
Job Creation Tax Credit
Long-Term Employment of Ex-Felons Tax Credit
Maryland Disability Employment Tax Credit
Maryland-Mined Coal Tax Credit
One Maryland Economic Development Tax Credit
Research and Development Tax Credit
Telecommunications Property Tax Credit
Water Quality Improvement Credit
Work-Based Learning Program Tax Credit

The federal government, especially, offers a rich treasure trove of tax credits on everything from Energy Star appliances to adopting orphans. Here's a partial sampling of available tax credits American taxpayers have been able to avail themselves if they qualify:

Higher education tax credits
Child and Dependent Care tax credit
Child Care tax credit
Adoption tax credit
Elderly & Disabled tax credit
First time home buyers tax credit
Mortgage interest tax credit
Foreign tax credit
Earned Income tax credit
Export tax credit
Production tax credit

Recognizing the need to encourage more energy efficiency and conservation, Congress has authorized a host of tax credits for individuals and businesses. These can be lumped into three broad categories: home energy efficiency improvements, residential renewable energy systems, energy-efficient/alternative energy automobiles.

It is the last of these that seems to be sparking the most criticism of late, being viewed by some as federal largess heaped on the snobbish, wealthy few who will be able to afford the $41,000 price tag on the Chevrolet Volt at the expense of the rest of us. Writes 'Big Think', "Where does the federal government get off spending the average person's tax dollars to help better-off-than-average Americans buy expensive new cars?"

Clearly there is a misperception of what a tax credit is, so permit me to quote the United States Energy Department's definition:

A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. Consumers can itemize purchases on their federal income tax form, which will lower the total amount of tax they owe the government.

Let me repeat that last part: "which will lower the total amount of tax they owe the government."

A tax credit is not the federal or state government handing out your money or mine to other people. Certainly that goes on all the time, but they are NOT in the form of tax credits. A tax credit is the government allowing taxpayers to reduce the amount of taxes they owe. Take the "Adoption Tax Credit" for example. A family who adopts a child under the age of 18 is allowed to subtract $12,150 from the amount of taxes they owe that year. If the family owes $15,000 in federal taxes prior to the adoption tax credit, they will only own $2,850, and this is before any other tax credits for which they may qualify.

As one web site explains:

A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed.

Explains yet another tax-focused web site

The federal tax laws contains some fairly generous tax credits, for those who are lucky enough (or smart enough) to be able to take advantage of them. The credits can generally be divided into these four categories...

These include:

Credits for certain taxes - credits are permitted to offset the sting of certain taxes, including FICA taxes on tips for food and beverage establishment employees, foreign taxes, a portion of prior alternative minimum tax (AMT) liability, and gasoline taxes paid by farmers or off-highway-vehicle users. The "making work pay" credit for 2009 and 2010 is based on a portion of the FICA or SECA tax applicable to social security.

Credits for activities that benefit disadvantaged or low-income persons - there are a number of credits designed to encourage employment or investment that benefits certain groups: the welfare-to-work credit, the disabled access credit, the empowerment zone employment credit, the Indian employment credit, the low income housing credit, the credit for contributions to Community Development Corporations, and the work opportunity tax credit (formerly known as the targeted jobs credit, which has expired).

Credits for activities that benefit the environment - currently, the largest group of credits are those for investment in equipment or processes that save energy or protect the environment in some way: the alternative fuels credit, the credit for qualified electric vehicles, the reforestation credit, the energy credit, the alcohol fuel credit, the enhanced oil recovery credit, and the renewable resources electricity production credit.

Credits for certain other investments - the smallest (and shrinking) group of credits relates to certain investments that are deemed socially beneficial: the rehabilitation credit for old or historic buildings, the orphan drug credit and the research and development credit.

Historically, the oil and gas industry, for example, has used "multitude of federal corporate income tax credits and deductions result[ing] in an effective income tax rate of 11%... compared to the non-oil industry average of 18%." -- Union of Concerned Scientists

It is not the purpose of this commentary to debate of merits of tax credits, just to point out that they are woven everywhere into the fabric of the American economy. Somewhere, there's a tax credit available to just about every American taxpayer. Offering buyers of energy-efficient vehicles like the Chevy Volt or Nissan Leaf a $7,500 tax credit is just classic government incentives as work, the objective being to promote economically-positive activities. Unlike federal, state or local stimulus spending, which usually comes in the form of matching fund grants or repayable, low-interest loans, tax credits let all Americans who qualify pay less taxes. If I buy a Volt or convert my Prius to a plug-in, you're not paying for it, I am. But because I was willing to assume those costs and risks, the government allows me to pay a bit less in taxes this year.

And because my converted Prius or GM-built Volt runs largely on American-made electricity and not imported oil, I am helping the nation reduce its trade imbalance, its need to maintain a military presence in unstable, volatile parts of the world, all the while slightly diminishing the need for oil companies to explore in places that are too deep, too cold, and too environmentally risky. I save on my day-to-day transportation costs, while stimulating demand for the technology that will be needed in the post-petroleum age coming in another decade or two.

Isn't that worth a bit of a break on my taxes?

So, the next time you hear someone bitching and moaning about their subsidizing liberal snobs' electric cars, ask them to show you their tax return and see if there are any tax credits they've used to pay for your lavish lifestyle.

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