The Biden Administration has not been known for embracing Fintech innovation and, in the past couple of years, has become more hostile towards digital assets in general. One aspect the Biden Administration is pursuing that may undermine crypto is the digital asset mining energy excise tax (DAME), which was proposed last year.
In a post by the White House from last May, the DAME tax was described as an “example of the President’s commitment to addressing both long-standing national challenges as well as emerging risks – in this case, the economic and environmental costs of current practices for mining crypto assets (cryptomining, for short). After a phase-in period, firms would face a tax equal to 30 percent of the cost of the electricity they use in cryptomining.”
The Biden Administration claimed that the energy consumption from crypto mining has a negative impact on the “environment, quality of life, and electricity grids ” while the pollution tends to harm disproportionally “low-income neighborhoods and communities of color.” The Administration said the mining can drive energy prices higher while straining electrical grids.
This past week, the Competitive Enterprise Institute (CEI) published a report that effectively refuted these claims while criticizing the policy of a new tax targeting crypto miners. Authored by James Broughel, along with co-authors John Berlau and Ari Patinkinuthors, said that an electricity tax penalizing crypto companies would do more harm than good while stifling innovation as well as consumer well-being: The policy “wouldn’t even make sense given the rapid pace of change in the industry.”
CEI noted that energy usage for miners is not large when compared to other industry sectors. More pointedly, the report claims that the energy usage of traditional payments from banking firms exceeds that of Bitcoin mining – the main culprit in the eyes of the White House.
CEI explains:
“This energy [used by miners] is not wasted but invested in creating a new, potentially more secure financial ecosystem. While there has been considerable media attention on crypto scandals, such as the collapse of the exchange FTX or remittances flowing to various nefarious actors abroad, the industry continues to provide a variety of benefits that often go overlooked, ranging from increased financial inclusion to decentralization and enhanced privacy. Thus, there are benefits that must be understood before governments consider whether to limit the crypto industry’s electricity use through taxation or other means.” [emphasis added]
Markets Always Win.
This may fall under the law of unintended consequences (or maybe not). Undermining digital asset innovation may create more harm than good as underbanked segments of the population will not benefit from improvements in financial services that are driven by digital asset technology. CEI posits that the DAME tax is discriminatory, picking winners and losers, while pushing innovators to other jurisdictions. Whyel, the White House is predicting billions in revenue from taxes. Past experience shows these predictions frequently never achieve their erstwhile goals. Perhaps more quixotic, if miners move to other, less developed jurisdictions, more pollution may be emitted if they land in countries that rely more heavily on carbon-based energy.
CEI is of the opinion that “policymakers should let this nascent market continue to mature rather than restrict its growth and development through discriminatory taxation.” The Authors state:
“President Biden’s proposed 30 percent tax on the cost of electricity used in crypto mining amounts to a back-door carbon tax, imposed on a specific industry and focused on electricity use rather than emissions. It may be that the attack on crypto companies is just the beginning of a larger government agenda to punish electricity use. The innovation and dynamism from emerging market sectors such as crypto is vital to ensuring not just rising living standards but improved conservation efforts as well.”
CI connected with lead Author James Broughel with a couple of questions regarding the report. We asked if the DAME tax was emblematic of Bidenonomics.
“The DAME tax can be viewed as part of President Biden’s “whole-of-government” tax and regulatory agenda. Agencies across the federal government are trying to address climate change through every means possible. The crypto mining tax is one example,” said Broughel.
So, in effect, is this a policy designed to kill crypto by making it too expensive? Is the White House just posturing its policy as mitigating impact?
Broughel said this policy is absolutely intended to punish a politically disfavored industry. It is essentially Operation Choke Point but for power usage.
“With Operation Choke Point, government officials targeted sectors they deemed objectionable by pressuring the banks and payment networks that provide them with financial services. Industries like firearms dealers, payday lenders, and fossil fuel companies were targeted, despite any evidence of illegality. The crypto mining tax applies similar logic, but targets an industry’s energy use rather than its use of financial services.”
Regarding the law of unintended consequences, we asked Broughel to provide another example of an administration seeking to tax an industry excessively with unforeseen consequences.
He cited the yacht tax that was imposed in the early 1990s. The tax was intended to target wealthy purchasers of luxury boats. However, the rich cut back on buying yachts, severely impacting the yacht manufacturing industry. This led to significant job losses in the industry, and the tax was eventually repealed several years later.
As the US is effectively self-sufficient in regard to energy and future innovations are predicted to drive costs lower while removing undesirable impacts, is this more of an election strategy?
“The tax probably has little chance of passing in the short term. But it signals a possible desire from the administration to implement a broader federal electricity tax or to enact a backdoor carbon tax that starts by targeting one industry before moving on to others,” Broughel stated. “We should expect more efforts to target politically disfavored industries. For example, I expect a similar debate to play out over the energy use of the artificial intelligence industry, which needs increasing amounts of computing power to innovate.”
Asked about the net effects of the tax, Broughel said the tax creates winners and losers and could slow innovation in an industry that is making great strides to improve its energy efficiency and to source power from cleaner energy sources. Most problematic is the tax sets a dangerous precedent that says policy makers should be able to punish a specific industry they don’t like, even when that industry is acting in accordance with the law.
So, who really loses with this punitive policy?
“If the tax were to pass, cryptocurrencies based on the proof of stake validation procedure would benefit at the expense of those that rely on proof of work. It’s also possible many mining companies would choose to move to other countries where taxes are lower or nonexistent, in which case the U.S. loses business and economic growth to foreign rivals. This is realistic, given mining can take place from anywhere.”
The CEI Report – Don’t Depower Crypto: Biden’s Electricity Tax Would Harm Conservation, Innovation, is available here.