The Law Of Unintended Consequences

What both legislators and the public overlook with alarming frequency is that when a law is enacted, there may be consequences that the supporters of the law never dreamed of. Sometimes, this consequence diverges 180 degrees from the original intent of the supporters of the law. Such is the case with the generous tax credit for mixing alternative fuels with fossil fuels. The object here was to increase the usage of ethanol and gasoline blends, which reduces the amount of gasoline consumed while not coincidentally providing a boon for corn growers. But in one case the enactment of the tax credit has caused the opposite effect in the paper industry. Part of the paper production process is the creation of a waste product called black liquor. For 80 years the paper industry has used black liquor as a fuel source to run their mills. Black liquor is as much of an alternative fuel as ethanol. So by ADDING fossil fuel to black liquor, rather than using pure black liquor, paper mills are entitled to this tax credit to the tune of tens of billions of dollars, while increasing the consumption of fossil fuels at the same time.

Clearly, when the tax credit was enacted, the intent was for alternative fuels to be added to fossil fuels to garner the credit. It wasn't meant to provide a reward for fossil fuels to be added to existing alternative fuels. But that's exactly what happened. Now there's no doubt that the black liquor tax credit will eventually be repealed. Because of the snail's pace at which Congress enacts tax (or for that matter, any) legislation, this credit is still available even though this unintended consequence has been well known for quite a while.

Unintended consequences also occur when supporters of a proposal fail to take into account potential behavioral responses to the new law. For example, the Obama administration proposed last year that US corporations with foreign income earned abroad that is not immediately subject to US tax should not be able to deduct the associated expenses relating to that income, until the income is recognized in the United States. On the surface that sounds like both a fair proposal and a revenue generator in these times of scarce government revenue--a real win-win situation for the government. Except that US multinationals pointed out that in such a situation, the rational thing for them to do would be to move those expenses offshore, since there would be no current tax benefit in any country for such expenditures under the proposal. And given that the expenses in question would in many cases be comprised of services performed by employees, the result of the proposal would be to incentivize U.S. multinationals to move American jobs overseas. Fortunately the Obama proposal never got very far in the legislative process, and recognizing this original unintended consequence, the Obama administration has now dropped that proposal

The lesson here is that before strongly advocating the passage of any new law, supporters need to look carefully and understand what all the consequences are, not just the ones you want to occur.