Investment in Energy Infrastructure and the Tax Code
Federal tax policy provides a broad array of incentives for energy investment. I review those policies and construct estimates of marginal effective tax rates for different energy capital investments as of 2007. Effective tax rates vary widely across investment classes. I then consider investment in wind generation capital and regress investment against a user cost of capital measure along with other controls. I find that wind investment is strongly responsive to changes in tax policy. Based on the coefficient estimates the elasticity of investment with respect to the user cost of capital is in the range of -1 to -2. I also demonstrate that the federal production tax credit plays a key role in driving wind investment over the past eighteen years.
This paper was written for the 2009 NBER Tax Policy and the Economy Conference. I wish to thank Jeff Brown for helpful comments, Zhuyuan Zhou for her expert assistance in the data collection and analysis and the Manhattan Institute for Policy Research for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.