Virtually from the day he took office, President Barack Obama
has railed against the oil and gas industry, arguing it’s not
paying its fair-share of taxes. Each of his budgets has called for
hiking the industry’s tax bill by at least $4 billion annually
through removing unwarranted “subsidies.” He and his anti-carbon
true believers want to use these captured revenues to double-down
on renewables in pursuit of the President’s clean energy
agenda.
Unfortunately, President Obama, as well as many other
politicians and the media, uses the terms subsidy, tax preferences,
deductions, incentives and loopholes interchangeably, implying
there is something inherently unjust about the tax code. In fact,
the 13,000-page Internal Revenue Code is designed not only to raise
revenue but to induce individual and business behaviors that are
deemed beneficial to society or the economy.
For example, home ownership is encouraged through the deductions
for mortgage interest and local property tax payments. Personal
saving is boosted through provisions that permit tax deferrals on
current income deposited into IRAs and 401(k)s. And the tax code
contains hundreds of provisions to encourage businesses to
undertake certain desirable activities, such as the search for
energy resources.
President Barack Obama says it’s time to remove the huge and
unnecessary subsidies to the oil and gas industry. But the industry
doesn’t actually receive “subsidies.” What it does receive is
access to the same “deductions” that are available to most
corporations. Simply put, deductions from gross revenue allow
businesses to write off legitimate expenses incurred in the
production of that revenue to ensure that taxes are levied on net
income.
By contrast, a “subsidy” is a direct payment from the government
— i.e. taxpayers — to a business enterprise. Currently, renewable
energy sources such as wind and solar are being subsidized to the
tune of $12.5 billion a year, presumably because of the perceived
environmental benefits that attend these non-polluting
technologies. The argument for continuing these subsidies is that
wind and solar are infant industries that have not yet achieved
economies of scale. But that is never likely to happen because
renewables — with the exception of hydropower — are unable to
achieve the scalability and energy density of generating plants
fueled by coal, natural gas or nuclear.
In contrast to renewables, the oil and gas industry receives
about $2.8 billion in tax preferences. Not only do these incentives
pale by comparison to the subsidies for wind and solar, especially
when compared on a Btu-equivalent basis, but the economy gets a lot
more bang for the buck.
Two thousand eleven was the third consecutive year of higher
domestic oil production, while natural gas output reached an
all-time high. Over the past five years, about 158,000 new jobs
have been created in the oil and gas industry while employment
growth associated with renewables has been minuscule. Indeed with
the recent failures of Solyndra, Beacon Power, and other renewable
energy companies, industry-wide employment has probably
declined.
Specifically, the President wants to prohibit oil and gas
companies from utilizing the Section 199 manufacturing deduction
that allows companies to retain earnings for reinvestment by
charging them a reduced tax rate.
Eliminating this particular deduction would have a dramatic
impact on the job market, encouraging segments of the oil and gas
industry to outsource their work to countries with lower tax rates,
and it could also result in higher prices for gasoline, diesel, and
jet fuel. In addition, some lawmakers want to remove the credit for
taxes paid abroad by U.S. energy companies. Both of these proposals
are discriminatory in that no other industry would be under the
same constraints.
Tax discrimination is bad public policy as is wasteful
government support for technologies like wind and solar that,
despite more than a decade of handouts, still can’t meet the market
test.
