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Monday, January 25, 2010

Mercer Chooses Incomplete Math on Renewable Energy/Sales Tax Equation

Bob Mercer throws Senator Russell Olson (R-8/Madison) a lifeline to defend his vote against renewable energy and tax breaks. Mercer blogs about the "hidden costs" of Senate Bill 58:

Every kilowatt-hour produced by one of these small generators for personal or business consumption is a kilowatt-hour of electricity that isn’t purchased. And every kilowatt-hour of electricity not purchased is a kilowatt-hour on which no sales tax is collected. The purpose of the PUC’s exemption is to encourage small-renewable systems. The unintended effect however is a permanent erosion of sales tax revenues that could eventually grow to the millions of dollars annually [Bob Mercer, "Hidden Costs to State Treasury of PUC's Exemption Plan," Pure Pierre Politics, 2010.01.24].

Mercer carefully avoids saying this cost is a reason to vote the bill down... but his language makes pretty clear he doesn't think highly of SB 58 and the seemingly "inevitable" conversion to renewable energy.

Mercer's logic is short-sighted. All he's looking at is the electric meters of folks who will take advantage of the PUC's Small Renewable Energy Initiative to install wind and geothermal and hydrogen units to produce some of their own energy. His calculus doesn't include...
  • increased sales of renewable energy equipment;
  • increased purchasing power from employees of new renewable energy sales and service companies;
  • savings to consumers and electric companies who don't have to build new peak-load facilities as quickly (meaning more purchasing power for other goods, and more sales tax revenue).
Mercer also declines to acknowledge the social and environmental benefits of small renewable energy. South Dakotans will make more of their own energy. We'll be less dependent on the grid. When snow and ice knock out power for 10,000 South Dakotans, more of those folks will have affordable back-up power. We'll reduce pollution from coal-burning power plants.

By Mercer's logic, my electric co-op, Sioux Valley, is doing the state wrong by shifting its focus from growth to energy efficiency. The same logic would discourage rummage sales and do-it-yourself carpentry (how much lumber and equipment do woodworkers buy?). The same logic would say our Department of Health shouldn't fight obesity: after all, how would we replace all the sales tax we get from fat people ordering seconds?

Mercer's argument indicates the foolishness of the sales tax. The state becomes wedded to ever-increasing consumption. When faced with a good bill like SB 58, short-sighted conservatives like Senator Olson can argue, "But people will buy less stuff!" A state taxing food and energy purchases has a motive to encourage gluttony and waste. A state taxing income has a motive to encourage industry and wealth.

SB 58 will indeed cause a reduction in sales tax revenue—or at least in the growth thereof—if all you look at is the electric meters. But if our legislators look at more than the back of Bob Mercer's envelope, they'll see an increase in jobs, purchasing power, and energy self-sufficiency.


  1. Mercer might add a corollary to his argument. Anyone who fills their freezer by having an animal butchered rather than buying meat at the store is robbing the state of sales tax revenue. That hog or steer you bought from the local farmer and had the neighborhood locker plant butcher and package was really a sales tax avoidance scheme on your part. Never mind the fact that you paid sales tax on the cost of the butchering.

    Oh, and the garden you tend each summer and from which you enjoy the produce fresh, canned, or frozen? Just another thief stealing from the state treasury.

    Now wipe that homemade spaghetti sauce with locally produced spicy pork sausage off your face and head on out to Super Walmart to refill the state coffers.

  2. Steve Sibson1/25/2010 7:49 AM

    Nick & Cory,

    So you two agree that it is the individual who is the answer and not government?

  3. Steve, sometimes the individual is the answer. Sometimes the collective power of the masses deployed in the form of government is the answer.

  4. Nick,

    And the butcher pays property tax for his business, and the farmer pays property tax for ground on which that steer or hog is raised and the feed is raised. And you pay property tax on the garden where you raise that wonderful home-grown produce.

  5. Steve Sibson1/25/2010 8:30 AM

    Bob, just nailed the truth on this issue. This legislation is not fair and just.


    Government stepping in and interfering with the free-market is wrong. As I have been saying here and at my web site recently, an oversized government helps out those who have the resources to deal with big governemnt (in this case Dakota Rural Action is an example), and that puts individuals at a disadvantage.

  6. Bob, the property tax on the farm will be no different if that hog was sold to Smithfield and shipped straight to Sioux Falls. The property tax on Cory's garden plot would be the same whether he raised produce, lawn grass or kochia weeds. The only place that might be paying property tax that would be missed would be the local butcher plant that wouldn't exist if no one butchered their own.

    If I was a betting man I'd bet that it will be quite a few years before the potential lost sales tax on home grown electricity will exceed the current lost sales tax on home grown food and I don't hear anyone clamoring to plug that loop hole.

    This lost sales tax argument sounds like something the energy industry lobbyists sitting outside the South Dakota Senate cooked up and threw against the wall hoping it would stick.

  7. Nick,

    What I'm saying, if you go back and read the original post, is that a broader and longer look needs to be taken. Why is the Legislature looking at raising motor-fuel taxes? In part because of fuel efficiency, which is a good thing unless you sell oil. As we look into the near future, with the arrival of more electric fuel vehicles, motor-fuel tax revenues will fall. How do we replace that "lost" money while still expecting safe, good roads and winter maintenance? Likewise, we could only hope that homegrown electricity becomes so popular that utilities don't need to invest as much in new plants (of whatever type). But again, as sales of electricity flatten or even fall, and property-tax exemptions are granted for renewable systems, how will that revenue be replaced for funding the rising expenses of government services, whether it's a county courthouse or a local driver-license exam station or a rural school or grading county roads?

  8. Steve Sibson1/25/2010 9:04 AM

    "His calculus doesn't include...

    [1]increased sales of renewable energy equipment;
    [2]increased purchasing power from employees of new renewable energy sales and service companies;

    [3]savings to consumers and electric companies who don't have to build new peak-load facilities as quickly (meaning more purchasing power for other goods, and more sales tax revenue)."


    [1] you don't include lost sales of non-renewable energy equipment
    [2] you don't include jobs lost in the non-renewable energy sector
    [3] I have not seen that these are more cost effecitve for the consumers. If they were, you guys would not need tax incentives to sell them.

    Therefore, your headline is wrong.

  9. Wow, this is so ridiculous. So what if it erodes taxes? If the state has a short-fall, it can always increase taxes elsewhere. This isn't a zero sum game. This guy's whole position just begs the question.

    More importantly, these off-grid generation sources will add productivity in other areas which will certainly be taxed.

    So a business could either:

    1. Spend the money on existing power and pay taxes.
    2. Put in renewables, save tax dollars, spend it else where to be more productive/competitive but have it taxed in a different fashion.

    Either way the state gets its tax dollars. We either choose to enhance the competitiveness of the business or not.

  10. Steve Sibson1/25/2010 12:53 PM

    "If the state has a short-fall, it can always increase taxes elsewhere."

    If you want these devices go ahead, but why do you expect others to pay for them?

  11. Steve-

    Many reasons:

    1. The state already discounts the cost of non-renewable energy through subsidies. This is more of a leveling of the playing field. Your question could equally be put, why do we subsidies non-renewable power. "Others" are already paying.

    2. Non-renewable power externalizes its environmental pollution by dumping it into our shared air. Renewable sources do not. All of the pollution in their construction is factored into the cost. Again, free dumping of pollution into the atmosphere is a subsidy to non-renewable power. This is a leveling of the playing field. "Others" are already paying.

    3. Fossil fuels are limited. We recognize their costs will only go up. This is an investment in the future that a traditional free-market with a quarterly profit motive is not capable of utilizing. Free markets are great at minimizing immediate costs. They are very bad at long term thinking. Housing/Tech/Financial bubble are examples.

  12. Steve Sibson1/25/2010 1:53 PM


    1). I agree that other forms of energy should not be subsidized.

    2). Environmental impact is an interesting point. Problem is putting a cost on it.

    3). And when fossil fuels become limited enough to raise their prices, then making the renewables are more cost efficient, the market will turn to them naturally. The government should not be forcing the market to use them sooner.

  13. Steve-

    With regards to 3, the market is only capable of handling smooth transitions well. Our current housing crisis and economic down turn illustrate that fundamental challenge. If we want a smooth transition when fossils run out, we must foster the transition over long time scales to use market forces.

    In addition, new technology must be developed to solve the problem. Technology development is prohibitively expensive and also not a guarantee. If we choose not to subsidize it now, we risk not having it when prices may grow by orders of magnitude as opposed to factors of 2 or 3.

  14. Steve Sibson1/25/2010 7:46 PM

    "With regards to 3, the market is only capable of handling smooth transitions well. Our current housing crisis and economic down turn illustrate that fundamental challenge."

    The housing crisis was caused by government interference into the free markets. (Federal Reserve, Freddie, Fannie, ACORN) The economic downturn was the response to that. You really need to get out of Cory's house and take a look at the real world. Start by reading Wood's Meltdown.

  15. I agree with Sibby, South Dakota's failure to thrive will always exacerbated by its generational entropy.

    Anger, hatred, racism, plunder, and winter; nothing will ever change.

  16. Steve, would a truly free housing market allow income tax deductions for mortgage interest?

    I'm just trying to determine what the parameters of government intervention are.

  17. Steve Sibson1/26/2010 7:41 AM


    A truly free market would not have an income tax.

    And the paramaters of government intervention is nothing beyond:

    1) Preventing employers from using force to obtain workers.
    2) Preventing fraud and corruption.

    Unfortunately, the government is out in front participating on the second point.

  18. Baby steps Steve. How would a truly free market government fund itself?

  19. Steve Sibson1/27/2010 5:47 AM


    How does the fair tax sound? The tax should be applied on the money we spend, not the money we earn. And we all should pay the same rate, and the government should not exempt the products of special interests, such as producers of small renewable energy equipment.

  20. (not sure if this went through the first time.) Would it really be millions of dollars in lost tax revenues as Mercer claims? How much is taken in now through electricity sales? Seems like solar and wind would be major contributors before that becomes a concern.

    I wonder if states that now have significant amounts of local energy production have faced this issue. I do know a similar issue that's discussed among RE (renewable energy) developers in other states is how do utilties pay for line maintenance when consumers along that line become producers.

    Seems like one solution would be to have utilities pay sales tax on power purchased from RE systems. That would be incentive for the state to make utilities pay market rate for RE electricity, the better to collect sales tax.

    Otherwise, for Republicans to oppose home, business and farm owners investing their own money to produce their own power, because they'd pay less sales tax--that'll never happen.

    Michael Melius


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