The Surprising Reason That Oil Subsidies Persist:
Even Liberals Love Them
If you were to survey people and ask the question “Should we subsidize oil companies?” — the overwhelming majority would undoubtedly respond “ No!” The idea that we are subsidizing oil companies generates outrage in many people, but in this article I will show why these subsidies aren’t going to go away any time soon. The reason may surprise you.
So let’s ask the question in a different way: “Should we allow oil companies to take a tax deduction also available to any U.S. manufacturer such as Apple or Microsoft?”
A lot of people will still answer “ No” to that question, but certainly fewer than answered “No” to the original question.
Now ask the question “Should farmers be allowed a fuel tax exemption for the fuel they use on the farm?”
In this case, some people are going to say “ No”, but farmers are going to be near unanimous in saying “Yes!”
Let’s ask one final question: “Should we fund programs like the Low Income Home Energy Assistance Program (HEAP) that help low-income families with their heating bills?”
The irony in this question is that some of the people who are the most vehemently opposed to fossil fuel subsidies will argue that this is an important program that helps keep poor people from freezing to death in winter, and thus it would be inhumane to eliminate it.
Yet unless you answered “ No” to all four questions, you support programs that have been specifically identified as fossil fuel subsidies.
Environmental activist and author Bill McKibben recently wrote an article called Payola for the Most Profitable Corporations in History. In the article McKibben proposes “five rules of the road that should be applied to the fossil-fuel industry.” But even as he advocates getting rid of them, McKibben demonstrated that he doesn’t really understand the nature of these subsidies — and this sort of misunderstanding largely explains why they persist. McKibben himself indicates sympathy for subsidies when he wrote: “Many of those subsidies, however, take the form of cheap, subsidized gas in petro-states, often with impoverished populations — as in Nigeria, where popular protests forced the government to back down on a decision to cut such subsidies earlier this year.” However, he then incorrectly asserts “ In the U.S., though, they’re simply straightforward presents to rich companies, gifts from the 99% to the 1%.”
That’s just not true, and a failure to understand this is why we continue to be outraged over fossil fuel subsidies in the U.S. (As an aside, characterizing the oil companies as “the 1%” is also misleading, because oil companies are overwhelmingly owned by the 99%).
Oil Change International is an organization focused on exposing fossil fuel subsidies. On their site they have a page on fossil fuel subsidies, which they define as “any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers.” They include a spreadsheet breaking down various fossil fuel subsidies utilizing data from a joint OECD-IEA report called Fossil Fuel Subsidies and Other Support. The summary of oil-related subsidies in the U.S. for 2010 totals $4.5 billion. That is a number often put forward; $4 billion a year or so in support for those greedy oil companies.
But look at the breakdown.
The single largest expenditure is just over $1 billion for the Strategic Petroleum Reserve, which is designed to protect the U.S. from oil shortages. The second largest category is just under $1 billion in tax exemptions for farm fuel. The justification for that tax exemption is that fuel taxes pay for roads, and the farm equipment that benefits from the tax exemption is technically not supposed to be using the roads. The third largest category? $570 million for the Low-Income Home Energy Assistance Program. (This program is classified as a petroleum subsidy because it artificially reduces the price of fuel, which helps oil companies sell more of it). Those three programs account for $2.5 billion a year in “oil subsidies.”
Oil Subsidies that Liberals Love
So why do we still have fossil fuel subsidies? Because almost nobody — not even Bill McKibben — wants to get rid of all of the programs that are classified as fossil fuel subsidies. I suspect McKibben would not advocate eliminating the Low Income Home Energy Assistance Program. Two of the most outspoken Democratic opponents of oil subsidies have strongly defended this particular program — even though it is classified by the OECD as the 3rd largest petroleum subsidy. When Republicans tried to cut funding for the program, Sen. Chuck Schumer, D-N.Y., called the proposal an “extreme idea” that would “set the country backwards.” Rep. Edward Markey, D-Mass, states on his website that he is a “longtime Congressional champion of providing assistance to low-income families to heat and cool their homes.”
In fact, look at the reaction from Democrats when President Obama tried to reduce funding for the program. Rep. Markey’s office said: “If these cuts are real, it would be a very disappointing development for millions of families still struggling through a harsh winter.” Sen. Jeanne Shaheen, D-N.H., noted her opposition: “The President’s reported proposal to drastically slash LIHEAP funds by more than half would have a severe impact on many of New Hampshire’s most vulnerable citizens and I strongly oppose it.” Sen. John Kerry, D-Mass., wrote a letter to President Obama that stated in part: “We simply cannot afford to cut LIHEAP funding during one of the most brutal winters in history. Families across Massachusetts, and the country, depend on these monies to heat their homes and survive the season.” Yet each one of these Democrats was defending a program that is lumped into that all-encompassing category of “oil subsidies.”
What is the Impact of Eliminating the Subsidy?
Of course many Democrats will complain that those aren’t the kinds of subsidies they are protesting. That’s not the point; the fact that some programs that are popular with Democrats are classified as oil subsidies is exactly why we will never be rid of oil subsidies. People don’t take the time to consider just what an oil subsidy actually is. If they did they might find that they are a beneficiary.
There are certainly other tax deductions that do more directly benefit the oil industry, just like every taxpayer has tax deductions that benefit them. Many taxpayers take advantage of a mortgage interest deduction, but I bet they don’t think they are collecting subsidies just because they sliced a small portion off of their tax bill with that deduction.
Last year CNN did a story where they put together their own list of the so-called oil subsidies, and in their list the “largest single tax break” — amounting to $1.7 billion per year for the oil industry — is a manufacturer’s tax deduction that is defined in Section 199 of the IRS code. This is a tax credit designed to keep manufacturing in the U.S., but it isn’t specific to oil companies. It is a tax credit enjoyed by highly profitable companies like Microsoft and Apple, and even foreign companies that operate factories in the U.S. Further, the deduction for oil companies is already limited. Apple is able to take a 9% manufacturer’s tax deduction, but ExxonMobil is only allowed to take a 6% deduction.
It is really irrelevant how profitable Apple might be. The argument that “they are rich and therefore don’t need it” doesn’t mean that elimination of the tax credit will therefore have no impact. If there is a compelling financial advantage for them to build a factory overseas they will do so. This tax credit provides incentive for them to keep manufacturing in the U.S.
Likewise, ExxonMobil has access to oil fields and refineries in many foreign countries. If they are comparing projects here and abroad, that tax credit will factor into their decision. Whether it is enough to push them one way or another is something I don’t know. Many opponents of subsidies imagine that the impact will merely be taxpayer savings as ExxonMobil loses out on this tax credit. But what if the impact is that we lose domestic jobs as ExxonMobil shifts operations out of the U.S. (something that tax credit was designed to prevent)? What if the impact is that we continue to use just as much oil, but more of it now comes from overseas because we placed our domestic producers at a competitive disadvantage? To determine that there should be some independent analyses to examine the impact.
When to Subsidize?
I agree with the definition provided by Oil Change International; that a fossil fuel subsidy is any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers. I also agree that both oil production and consumption are subsidized in various ways. But these subsidies aren’t the cash payments to oil companies that many people imagine. If they were, they would be much easier to eliminate.
It is certainly acceptable to debate whether subsidies such at the manufacturer’s tax credit should be eliminated. But it is important to be informed as we discuss the issue. Anyone who discusses elimination of specific subsidies should know the answer to three questions: 1). What is the purpose of this subsidy?; 2). Is it working as intended?; and 3). What is the projected impact from eliminating it? For manufacturer’s tax credit, the intended purpose of course is to keep manufacturing in the U.S. Whether it has actually been worth the money is something that I can’t say without seeing a study on the impact of the tax credit.
The ideal use of a subsidy should be when we want to stimulate action that would not have otherwise been undertaken. Regardless of how profitable a company is, they are not going to intentionally make unprofitable business decisions unless an incentive such as a regulation or a subsidy is applied. If we subsidize an action that would have been undertaken in any case — business as usual — then that would not ordinarily be a good usage of tax dollars. Opponents and proponents are both apt to make unsubstantiated claims with respect to a subsidy’s impact, but they need to have some basis for their opinions. Otherwise we may relearn the lesson that some actions have undesirable consequences. If you simply take the position — “They don’t need these tax breaks“ — then don’t be surprised if they make decisions you didn’t expect them to make.
Conclusions
If we are to have a productive discussion of fossil fuel subsidies, it is important that participants understand what they are, their intended purpose, and the projected impact of removing them. Projecting the impact requires more than a guess. Because of misleading political rhetoric, people imagine these subsidies as cash payments to oil companies. But, many of these subsidies are not what people think they are.
In many cases they are benefiting people who have nothing to do with the oil industry — yet the money spent on these programs is still tallied against the oil industry. The result is a great deal of anger over spending that often benefits the angry people. That is why it is so hard to get rid of fossil fuel subsidies; a majority of the population likely supports at least some of them without realizing that they are in fact subsidies. And until those who are loudly screaming that we must eliminate these subsidies actually take the time to understand what they are — as well as the impact of removing them — we can expect there will continue to be much heat and little light on this topic.
This article is available online at: http://www.forbes.com/sites/energysource/2012/04/25/the-surprising-reason-that-oil-subsidies-persist-even-liberals-love-them/
