The Public Policy

Guess What, Mr. President?

The oil and gas industry does not receive subsidies.

By 4.10.12

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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.

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About the Author

Bernard L. Weinstein is associate director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business and a fellow with the George W. Bush Institute.