TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, October 6, 2012

Mitigating the Unintended Consequences of Biofuel Tax Credits

John Cobb (J.D. 2012, Harvard), Note, Mitigating the Unintended Consequences of Biofuel Tax Credits, 49 Harv. J. on Legis. 451 (2012):

Biofuel tax credits can lead to unintended consequences when coupled with a biofuel consumption mandate. Models produced by economists have demonstrated that the economic incidence of biofuel tax credits falls on producers of petroleum-based gasoline and consumers of fuel in general rather than on biofuel producers when these credits operate under a binding biofuel consumption mandate. Ideally, these two policies would not be combined. However, these economic models do not take into account how regulatory actors react to the presence of these tax credits, and their economic incidence depends on the presence or absence of a regulatory reaction. Given currently existing law, the EPA has the ability to mitigate the unintended consequences, in certain circumstances, by relying less on its waiver authority to offset the impact of the tax credits on motor vehicle fuel prices and consumption.

The example of biofuel tax credits teaches three general lessons about using tax provisions for regulatory purposes. First, it shows that regulators must pay attention to questions of tax policy when they impact their field of regulation. In order to faithfully carry out the mission delegated to them by Congress, regulators need to have an understanding of how tax provisions affect the markets they are regulating. Second, it shows that tax policymakers need to pay attention to what regulators are doing. It is very well understood that the actions of market actors can shift the economic burden or benefit of a tax provision onto a different person from the person legally subject to tax. However, the same can be true for the actions of regulators, and these actions need to be analyzed as well if the ultimate effect of a tax provision is to be properly understood. Finally, it calls into question the idea of using the tax code for regulatory purposes rather than for raising revenue in a fair and efficient manner. Is a policy that requires regulators to understand public finance and tax policymakers to understand the details of a regulatory field workable in practice? This kind of complexity only adds to the costs of coordinating tax and regulatory policy and makes it more likely that there will be unintended consequences.

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