October 03, 2011

Repealing Oil and Gas Subsidies to Fund the Jobs Bill: Good Policy Any Way You Look at It

This post was written by Member Scholars Kirsten Engel, William Funk, and Joseph Tomain, and Policy Analyst Wayland Radin.

The President’s recently announced American Jobs Act would be partially funded by repealing oil and gas subsidies, including subsidies in the forms of tax credits and exemptions. Eliminating these unnecessary and harmful subsidies would be a long overdue step toward sound climate and energy policies. Oil and gas subsidies cost American taxpayers billions of dollars every year, but have long since ceased to serve any clear policy goal. Rather, they inflate the profits of an industry that is already highly profitable.

Federal energy subsidies are criticized as wasteful government spending by politicians on both sides of the aisle.  But not all energy subsidies are wasteful. When properly targeted, federal subsidies can achieve social benefits that elude the free market, such as a clean environment. Subsidies and tax credits can even the playing field where some industries receive a free ride due to unaccounted for externalities, like environmental pollution. Subsidies can also provide a boost to fledgling markets impeded by large start-up costs. Indeed, subsidies greatly assisted the U.S. oil and gas industry in its nascent stages. The truth, however, is that the oil and gas industry no longer needs them and their continued existence hampers an industry we need much more: clean and renewable forms of energy.

The substitution of renewable forms of domestically produced energy for oil and gas would serve several socially desirable goals. First, it would strengthen our national security by making us less reliant on oil from foreign regimes that are shaky or hostile. Second, it would reduce our carbon footprint and take a step in the right direction on climate change. Third, it would position the United States as a technological leader in what is becoming an increasingly important worldwide renewables market, only temporarily stalled by world financial conditions. At the same time, the market for renewable energy still struggles, so it is appropriate for it to receive support in the form of state and federal subsidies. A study by the Environmental Law Institute found that renewable energy (wind, solar, hydro, wave, and geothermal), received a total of only $12.2 billion in federal subsidies from 2002 to 2008. During that same time period fossil fuels received $70.2 billion in direct federal subsidies, many of which took the form of tax-breaks for foreign oil production (and that number didn’t count a penny for certain indirect subsidies, like massive federal spending on roads, which facilitate oil use).

This vast discrepancy in continued federal support is not justified by the state of the respective energy markets for fossil fuels and renewables.  In fact, the opposite is true: the oil and gas industry has not needed the federal support it continues to receive for many years, while the renewable energy industry has had to fight tooth and nail to remain viable. Obama’s plan to cut oil and gas subsidies while continuing to support alternative energy thus seems like a no-brainer. Indeed, if we take the President’s critics on the Right seriously about spending cuts, then the government can stop spending on fossil fuel industries by the elimination of tax breaks and other financial expenditures. 

However, the President’s proposal has faced heavy criticism, some of which is based on false claims about how subsidies work. Earlier this year, prior to the introduction of the American Jobs Act, Speaker Boehner opposed legislation that would have ended $8 billion a year in oil and gas subsidies, saying that it was an increase in taxes and that it would be “blocking more American energy production.” Neither of these arguments holds water. 

To call the reduction of a subsidy an increase in taxes is simply a rhetorical ploy designed to appeal to anti-tax sentiments. While it is true that eliminating the tax breaks the oil and gas industry currently receives would result in increasing their tax bill, this line of reasoning fails to acknowledge that any exemption from a generally applicable tax is actually government expenditure equivalent to the direct federal funding the oil and gas industry also unnecessarily receives. What Boehner calls “raising taxes” is really decreasing the special giveaways the federal government gives to oil companies.

Nor would eliminating oil and gas subsidies impede US energy production. The Energy Information Administration has estimated that it costs approximately $30 to produce a barrel of oil in the United States, while oil currently trades at about $80 a barrel. This market does not need tax breaks to survive. And given the current profitability of the oil industry, repealing subsidies is unlikely to affect prices at the pump. The drive to retain unnecessary subsidies is simply unadulterated greed.

Joseph Tomain, CPR Member Scholar; Dean and Professor, The University of Cincinnati College of Law. Bio.

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