Dear Virginia,

You may have heard it recently on talk radio or in a heated policy debate in Alaska: “inflation is just a hidden tax….” It is a popular rhetorical line because it sounds sharp, informed, and emotionally satisfying. It is also wildly inaccurate.

Inflation is not a tax. It is the predictable result of monetary policy in a fiat currency system such as ours. And the federal Section 45Q tax credit does not cause, or meaningfully contribute to, the inflation families currently see at the grocery store or the gas pump. It is simply not true.

Inflation is a sustained rise in the general price level that reduces the purchasing power of money. In a fiat monetary system like the one used in the United States today, inflation occurs when the supply of money grows faster than the production of real goods and services. This is not a controversial claim. Milton Friedman said it plainly when he observed that inflation is always and everywhere a monetary phenomenon.

The Federal Reserve controls the money supply through interest rates, asset purchases, reserve requirements, and open market operations. When those tools are used aggressively, often to finance federal deficits or respond to political pressure during economic disruptions, too much money enters the system. Prices rise, wages lag, and savings lose value. That is inflation.

Calling inflation a tax may sound great and feel satisfying, but it blurs important distinctions. A tax is a direct levy imposed by law: income taxes, sales taxes, property taxes are all monies that the government explicitly collects. Inflation does not work that way. No agency sends you a bill for higher grocery prices, and no department deposits your lost purchasing power into a Treasury account.

It is true that excessive money creation allows government to spend without raising explicit taxes. Economists sometimes refer to this as seigniorage, or loosely as an “inflation tax.” But that describes a consequence of poor monetary discipline, not the definition of inflation itself. Conflating the two shifts attention away from the institutions actually responsible for the loss of purchasing power.

Inflation also does not affect people uniformly. It punishes savers and retirees on fixed incomes. It benefits borrowers, including the federal government, because debts are repaid in cheaper dollars. Its impact depends on income, debt, and asset exposure, not on a tax schedule passed by congress.

This brings us to IRS Section 45Q.

Section 45Q is a federal tax credit for carbon capture and sequestration. It currently pays up to eighty-five dollars per metric ton for certain projects. It exists to advance federal climate objectives; objectives which I strongly oppose. These carbon management controls are not driven by sound environmental economics or honest cost-benefit analysis. They are enforced through emotion, regulation, incentives, and pressure on capital markets rather than genuine demand.

My disagreement, however, does not change financial reality.

Large infrastructure projects today do not succeed or fail on engineering alone. They depend on access to capital, and access to capital is now filtered through federal policy, ESG frameworks, and boardroom decision-making shaped by incentives and penalties set in Washington. Private capital responds to those political signals whether we agree with them or not.

That is the environment Alaska is forced to operate in.

Within that environment, tools like 45Q often function as the toll required to unlock private investment. Using them is not an endorsement of the underlying climate cult theory. It is a practical response to a financing system that has already been distorted. The time to oppose these is a decade past us. It is a sunk cost and extracting value from that system to build projects that matter to Alaskans is not ideological surrender.

But what 45Q does not do is create inflation. It does not expand the M2 money supply or drive economy-wide price increases. Its fiscal footprint is small compared to federal spending and insignificant next to the growth of the money supply over the last several years. In fact, inflation has weakened the 45Q credit by raising project costs faster than the credit adjusts, forcing proponents to argue for indexing simply to maintain viability.

If deficit spending tied to credits like 45Q becomes inflationary, the cause is not the credit itself. The cause is monetary expansion by the Federal Reserve. The government’s printing press, not the tax code, is where inflation begins.

We should be honest on all fronts. I will continue to oppose carbon mandates and federal climate orthodoxy. I will continue to push back against ESG coercion and boardroom capture and board stacking. But I will not sacrifice Alaska infrastructure development to those who worship on the altar of ideological purity while Washington manipulates capital markets to favor politically preferred outcomes.

Inflation is not taxation by stealth. It is currency depreciation driven by policy choices. And 45Q, whether one supports it or not, is a current fiscal tool operating within that flawed system, not the source of the inflation families experience every day.

If we want accountability, we should stop repeating slogans and start focusing honestly on sound money, monetary policy, and the decisions that actually drive inflation.

Originally published on Substack: https://kevinjmccabe.substack.com/p/no-virginia-inflation-is-not-a-tax