Extreme Makeover

Pittsburgh, Pa.

Let's understand something. Pennsylvania is the coal capital of the world (well, pretty much). So why is my governor, Democrat Ed Rendell, pushing to hike taxes on electricity (produced by burning coal) so he can subsidize alternative fuels such as ethanol, something the state produces very little of?

Why shaft one of the state's most successful industries to subsidize venture capitalists from New York and California and farmers from Iowa? And if this is good for Pennsylvania, why did he wait until his second term to push for it? Weren't high electricity bills and abundant ethanol a good idea in 2006 when he was up for re-election?

I first met Mr. Rendell in 1995. We were speaking at a Reason Foundation privatization conference in Philadelphia. He was the mayor, and I had just founded a free-market think tank in Pittsburgh. Mr. Rendell was a leading "new Democrat" who had outsourced over 40 government functions, stared down the unions, and cut taxes. I liked him immediately.

I frequently pointed to the governor as the model for a new, growth-oriented Democratic Party. If the Democrats were to have a future with the entrepreneurial and investor class, he was it. And when rumors circulated that Mr. Rendell was considering a run to replace the term-limited Gov. Tom Ridge, I hosted a luncheon in Pittsburgh at which Mr. Rendell spoke. He graciously emphasized themes we held in common, such as cost-cutting and privatization.

Eventually Mr. Rendell ran for governor. He pointed to his record of cost control and tax cutting in Philadelphia. While he would not make a no-tax-hike pledge, he strongly suggested that he would not raise taxes. His running mate, Katherine Baker Knoll, was not so reticent. She explicitly told me there would be no tax hike.

I voted for him. I also supported him through my daily radio program. While I couldn't be sure Mr. Rendell was the right guy, I was willing to risk it. The Democratic Party needed to have its Kennedy growth wing revitalized, and winning elections would help.

He didn't need my help. Mr. Rendell won in a landslide, and early signs were promising. He set up competitiveness commissions and reached out to the tort-battered members of the Pennsylvania Medical Society. There were some less promising signs as well, including of borrowing money for a public works building binge.

After his first year in office, he lost interest in helping doctors and he stopped appearing as a frequent guest on radio. Other things changed too.

My wife runs a media business which produces a public affairs TV program -- "Pennsylvania Newsmakers, hosted by Terry Madonna." Mr. Rendell is a frequent guest on the show, and even a regular guest host. But the conversation shifted away from cost control and privatization, and toward borrowing and spending. Ribbon cuttings, not tax cutting, became the order of the day. Mayor Ed Rendell disappeared. Gov. Ed Rendell replaced him.

Then came the tax-hike proposals: to tax small business S-Corporations, to increase income taxes, to increase taxes on out-of-state corporations which do business in Pennsylvania. He got his way on some of the taxes; occasionally Republicans stopped him. But the change was clear. Mr. Rendell traveled the state with a giant barrel of borrowed pork money, a grin and an oversized ladle. He won re-election easily.

Then a third Ed Rendell appeared. After Reason Foundation Rendell and let-the-good-times-roll Rendell, Environmental Ed was now running the show. To a state already buffeted by deindustrialization, Environmental Ed offered new mercury emission standards stricter than federal standards. In a state already lacking development, Environmental Ed offered green-space initiatives which would lock up huge tracks of land. Now Environmental Ed wants to tax electricity usage to lavish $850 million on alternative fuel projects. The tax would hit industrial users -- who will pay as much as $10,000 a year -- but they will also zap every resident of the state.

This would be a big step backward. In the 1990s, the state implemented the most successful electricity deregulation plan in the country. While California blew it by deregulating retail prices but allowing spot prices to swing, the Keystone State's deregulation was more thorough. We started out as a state in which high electricity costs were an impediment to new business and ended up as a state that could brag about the cost of energy. That will change if we slap commercial electricity markets with new taxes on top of 6% sales and 6% gross receipts taxes.

Nor does any of this make environmental sense. Ethanol is land intensive and environmentalists are already worried about vanishing forest land. And taxing electricity will have the unhappy effect of discouraging the use of the most plausible energy alternative to oil. Will that help reduce greenhouse gases?

So Mr. Rendell's plan makes little economic or environmental sense and doesn't work in the calculus of Pennsylvania politics. What gives?

What gives is the national Democratic Party in which environmental gestures are an unshakeable plank. Pennsylvania has nothing more to offer Mr. Rendell. It gave him a mayorship, which he used to bolster the New Democrat credentials a candidate needs to win in a moderate state. It (and its future generations) gave him the giant checks and giant scissors he needed for the ribbon cuttings, which bought him a second term. But after that, Pennsylvania had given to Mr. Rendell everything it had that he wanted. I only wish I could say that he did the same for it.

Mr. Bowyer is chief economist of BenchMark Financial Network and a CNBC contributor.

