Fossil Fuel Subsidies in 2021? Give Taxpayers a Break.

President Biden’s sweeping new economic recovery plan aims to revive a beleaguered economy from a devastating pandemic, help advance racial equity and stand up to the widening climate crisis. 

A critical piece of this plan is a commitment to eliminate special giveaways to the fossil fuel industry embedded in the U.S. tax code. This commitment is good news for the planet and its people. The fossil fuel supply chain generates a tremendous amount of air and water pollution, and that harms our communities and threatens nature. The burning of fossil fuels is also the primary cause of climate change. Yet, industry continues to produce fossil fuels despite the low price of oil and gas and the availability of cleaner alternatives. This is in large part because fossil fuel companies often pay artificially low costs to produce and transport their destructive products. In effect, U.S. taxpayers are subsidizing these companies through federal tax loopholes.

Specifically, the plan calls for the U.S. to “Eliminate Tax Preferences for Fossil Fuels” and notes that, “The current tax code includes billions of dollars in subsidies, loopholes, and special foreign tax credits for the fossil fuel industry.” The plan goes on to declare that, “As part of the President’s commitment to put the country on a path to net-zero emissions by 2050, his tax reform proposal will eliminate all these special preferences.”

But that’s not how industry likes to be seen. In a tweet reacting to this step forward for public health and the environment, the American Petroleum Institute (API)—a major fossil fuel industry trade group—sought to deny its special tax giveaways: “It’s important to note that our industry receives no special tax treatment, and that we will continue to advocate for a tax code that supports a level playing field...”

It’s simply not true. Dozens of special tax loopholes save the oil and gas industry billions every year on the backs of taxpayers while putting our communities and nature at risk from pollution and climate change.

Two of the biggest giveaways include:

Intangible drilling costs are drilling-related expenses that have salvage value (don’t retain value after depreciation). Unlike most other sectors of the economy, the fossil fuel industry is permitted to expense these costs—approximately two-thirds of U.S. drilling costs - rather than depreciate them over the life of the well, saving the industry billions each year.

Another provision in the tax code allows oil companies to deduct 15% of the cost of revenues in developing a well. This deduction can often exceed the cost of developing the well in the first place and amounts to billions in taxpayer giveaways every year.

Congressman Earl Blumenauer (D-OR) introduced legislation recently (HR 2184) targeting several additional fossil fuel industry tax loopholes for elimination, including provisions that allow deductions for ‘enhanced oil recovery,’ an extraction method that injects materials into the ground to extract fossil fuels and largely benefits the natural gas industry. The legislation would also “deny the tax deduction for income attributable to domestic production activities for oil and gas activities.”

It is time for the U.S. to stop giving massive tax advantages to an industry that is doing harm to our communities, nature and climate. While loopholes in the U.S. tax code do not account for all the ways the fossil fuel industry foists costs it should be paying onto the public, eliminating them is an important first step. The world needs to phase out fossil fuels to protect the planet and its people. And as we move toward this goal, the oil and gas industry should be required to pay the full cost of its supply chain. Biden’s commitment to eliminating fossil fuel subsidies in the U.S. tax code is a critical step in realizing this vision.

About the Authors

Sujatha Bergen

Director, Health Campaigns, Health and Food Division

Susan Casey-Lefkowitz

Senior Strategic Advisor

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