Six More Weeks of Subsidies

The president wants to end fossil fuel subsidies—again. It must be Groundhog Day.

February 09, 2015

President Obama released his new budget proposal on Groundhog Day, urging Congress to cut more than $4 billion annually in oil and gas industry tax subsidies. He did the same thing last year, the year before that, the year before that, the year before that, and the year before that, all with the same reaction from Congress: indifference. I wonder if the president wakes up to “I Got You Babe” every morning.

Opinion polls suggest that between 62 percent and 70 percent of Americans think it’s a good idea to get rid of fossil fuel subsidies—even if they’re not exactly sure what they are and how much we’re giving away to Big Oil. Here are some answers.

What are these subsidies?

This is the most obvious question but the hardest to answer. Subsidies come in many forms, and there is debate over whether some should really count as subsidies at all.

First, there are a few benefits specific to the industry. In the early part of the 20th century, for example, the government allowed oil and gas explorers to write off the cost of equipment—a deduction which normally has to be taken over the course of the machine’s life—in the first year of operation. The perk costs the government as much as $3.5 billion annually, according to Mother Jones. Another benefit for fossil fuel companies is the Percentage Depletion Allowance, which allows smaller producers to reduce their taxable income based on the depreciating value of a well as fuel is pumped out. The government also leases federal land for mineral extraction at favorable rates.

Then there are tax subsidies that apply to all businesses, but oil and gas companies are able to take advantage of them in especially profitable ways. Consider the Foreign Tax Credit. When an American business pays tax to a foreign government on income earned in that country, it can deduct the payment from its U.S. tax bill. The idea is that you shouldn’t have to pay tax twice on the same income. Oil and gas companies, however, get an added bonus from this credit. Many oil wells abroad are owned by foreign governments rather than by private landowners or businesses. When ExxonMobil, for example, pays for the right to extract oil from those wells, it looks like a tax payment rather than an ordinary mineral rights lease, and it reduces the company’s U.S. tax bill. Reformers argue that when a foreign government is acting more like a business than a government, such payments shouldn’t be treated as taxes. This bit of esoterica, although boring, is significant. Oil and gas companies exploit this loophole in the Foreign Tax Credit for more than $2 billion annually.

Many other tax provisions fall into the same category—generally applicable but especially valuable to oil and gas producers. The Domestic Manufacturing Deduction, for example, pays firms to keep manufacturing jobs in the United States. Many budget hawks argue that the break shouldn’t apply to oil and gas companies, since they can’t export most of their jobs, which are tied to the location of the wells.

Then there are consumer benefits that indirectly help fossil fuel companies. The Low-Income Home Energy Assistance Program, for example, provides money to help poor families heat and cool their homes. It costs the government more than $500 million per year. It’s not exactly a handout to big oil and gas, and it serves an important social purpose, but some subsidy calculations do include it.

The Strategic Petroleum Reserve, the government’s stash of about 700 million barrels of oil, is another indirect subsidy. The reserve is intended to prevent major oil-producing nations from holding the world to ransom through supply manipulation. In essence, the cost of the reserve—which runs into the hundreds of millions of dollars each year—is an investment in functioning oil markets, which enables fossil fuel companies to reliably move their wares worldwide at predictable prices.

That’s just a sampling of fossil fuel subsidies. For a more exhaustive treatment, check out the 2009 Environmental Law Institute’s report “Estimating U.S. Government Subsidies to Energy Sources: 2002-2008” or the 2012 summary “Cut Pollution, Save Money, Build a Clean Energy Economy,” produced by the Center for American Progress Action Fund and NRDC (which publishes EarthWire).

How much money are we talking about?

Like I said, it depends on what you include. NRDC estimates the government spends $4 billion in benefits specific to the industry each year, or nearly $8 billion if you add in generally applicable deductions and credits. Mother Jones pegged the cost of subsidies at $4.8 billion per year. The Environmental Law Institute’s analysis (produced six years ago) returned a $10 billion estimate. The highest estimate comes from Oil Change International, which sets a range between $10 billion and $52 billion. Be aware that the high-end figure includes items like the Strategic Petroleum Reserve, the Low-Income Home Energy Assistance Program, and fuel subsidies for farmers. Those programs certainly help the industry, but few people advocate cutting them entirely.

Why are these subsidies so bad?

Climate change is bad, so oil subsidies are bad—because they make it harder for us to shift to a clean energy economy that would reduce carbon pollution.

Franz Matzner, NRDC’s associate director of government affairs, says giving Big Oil unnecessary breaks is like punishing taxpayers three times over. “We pay at the pump, on our tax bills, and with our health through dirtier air and dangerous climate change,” he says.

But wait, don’t some renewable technologies get tax breaks, too? They do, but the tax code is unfairly tilted toward fossil fuels. Congress made many fossil fuel subsidies permanent a century ago to create stability in the nascent industry. The beneficiaries are now among the world’s largest companies, generating the largest annual profits in the history of mankind. It’s fair to say they no longer need the help.

Wind and solar are in the position that oil and coal were 100 years ago, and yet the government has failed to offer them the same benefits. Almost all the renewable energy credits have to be, well…renewed, year after year. Congress regularly fails to do so, creating massive uncertainty for investors and stifling clean energy’s growth.

So why haven’t we eliminated the pure oil subsidies?

The short answer is money. Big Oil has it and wants to keep it. Here’s a longer answer.

Political scientist James Q. Wilson developed a theory decades ago to explain why popular policies are often not enacted, and why deeply unpopular policies can be so difficult to dislodge. Wilson argued that pure majorities rule on an issue only when both the costs and the benefits of a policy are distributed across the population. For example, the mortgage interest tax deduction. Most Americans either own or want to own a home, so they’re OK with the government spending a little money to incentivize that purchase.  

Oil and gas subsidies aren’t like that. The benefits are concentrated in a small group (oil and gas companies) that works hard to keep them, while the costs are distributed among all taxpayers. There are around 136 million U.S. tax filers. If oil and gas subsidies cost the government $5 billion a year, that means the average taxpayer only pays around $37. (The median taxpayer loses even less, since the top 10 percent of earners pay a larger majority of U.S. tax revenues.) Ordinary taxpayers simply lack the motivation to change these policies.

Oil and gas companies, by the way, have tons of money to throw at politicians, who help maintain the industry’s favorite tax policies. In the last presidential election, they contributed around $75 million to federal candidates and spent more than $140 million lobbying. How much money did you donate to oppose oil and gas subsidies in the last election? None? That’s why we haven’t gotten rid of them.

Illustrated by Wagner & GTZ (2008)

If it’s true that misery loves company, this next bit may brighten your mood some: Dozens of countries—each with its own interest groups and curious political situations—provide oil and gas subsidies. Although ours are among the biggest, countries like Iran, Turkmenistan, and Venezuela have even higher subsidies than the United States. Global subsidies exceed $300 billion, creating a serious distortion of the oil and gas market.

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So bookmark this page. I have a feeling the president is going to propose cutting oil and gas subsidies next year—unless he finds true love with Andie MacDowell. It’s probably the only way out of this.

onEarth provides reporting and analysis about environmental science, policy, and culture. All opinions expressed are those of the authors and do not necessarily reflect the policies or positions of NRDC. Learn more or follow us on Facebook and Twitter.

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