Should Fossil Fuel Subsidies go to Green Energy?
Obama focuses on corporate tax reform
President Obama is trying to renovate the country’s intricate tax system. He won’t succeed in time for the November election. But he might pull it off if he sticks around and can build on the existing bipartisan support to accomplish just that.
For now, the framework that the president has established is as much a political proclamation as its is a budgetary or tax document. Obama would reduce the top corporate tax rate from 35 percent to 28 percent -- to be paid in part by cutting or eliminating the breaks and subsidies given to the fossil fuel industry. Manufacturers, meanwhile, would see their top bracket fall to 25 percent.
“The tax code currently subsidizes oil and gas production through tax expenditures that provide preferences for these industries over others,” reads the president’s 2013 corporate tax reform plan. “The Framework would repeal tax preferences available for fossil fuels.” Such breaks, it adds, distort markets and serve to play down the strengths of green energy.
It’s reminiscent of bygone era -- just after the President Reagan had won a second term and one in which he rallied the nation to support tax reform. Like today, the call back then was to simplify the code and to minimize the “favoritism” in exchange for lower tax rates. Slowly but surely, however, the loopholes were re-applied, allowing the federal debt to climb as well.
In its most elementary form, the president’s proposals would eliminate specific tax breaks given to oil, gas and coal to the tune of about $41 billion over 10 years. Some of that money would be shifted over to help out renewable energy, including making permanent the production tax credit that will expire in December.
Many experts agree that it is much easier to close the existing loopholes provided to the mature fossil fuel industries than to raise their taxes. According to the White House Office of Management and Budget, oil and gas companies are to get $46 billion in subsidies during the next 10 years.
“While it is unlikely that Congress is prepared to complete action on tax reform in advance of the 2012 elections, key tax policy leaders in the House and Senate this year are expected to continue laying a foundation for tax reform ... to (possibly) overhaul US tax laws this year or in following years,” says Matt Haskins, PwC’s Sustainable Business tax leader, in firm’s 2012 outlook.
The concept of an intelligible tax code does have bipartisan support. But that is where the congeniality ends.
Oil companies make good political targets. No one likes paying high gas prices while they see those giant companies earning record profits. Do they really need those tax breaks? Would erasing some breaks truly deter their efforts to find new product? Here, sharp disagreements exist.
“Oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices,” says Obama’s corporate tax reform plan. “Repealing fossil fuel tax preferences helps eliminate market distortions, strengthening incentives for investments in clean, renewable, and more energy efficient technologies.”
The oil lobby is too powerful to give in. It is responding by saying that eliminating the tax breaks is a de facto tax increase. That would lead to less domestic energy, fewer jobs and less government revenue. The oil and gas industry pays $86 million each day into the federal treasury, the industry says, which references a study by the Strategic Energy & Economic Research calling oil and gas companies “probably the biggest stimulus” that this country has going.
“To spur new jobs, the president advocates tax breaks for everyone but the oil and gas industry – the one sector with the proven ability to create jobs and already supporting 9.2 million of them,” says Jack Gerard, head of the American Petroleum Institute.
Wind and solar require enormous subsidies and have not shown that they can operate at commercial scale, the petroleum industry has said publicly. Trying to replace fossil fuels by mandating the production of and use of renewables before the technologies are ready would only increase costs.
But critics maintain that the favorable tax treatment given to oil, gas and coal companies has been around since the early 1900s. They are the equivalent of government spending and Congress must account for each of those provisions. In an austere time, they say that the oil companies should make sacrifices.
Indeed, that’s the pitch that the Obama administration is now taking to the people. For the next few months, it will be politicized. But after the election, the message may have wider resonance in the context of corporate tax reform.
EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.
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Industry thought leaders will be discussing this topic and more at the upcoming EnergyBiz Leadership Forum, Harnessing Disruption, taking place in Washington D.C., March 19-21, 2012. Review full conference details by visiting www.energybizforum.com