Here at the American Council for Capital Formation, we have contributed extensive commentary to clarify the definitions of subsidies, deductions, and various tax provisions and their implications on public policy. Often times, we have witnessed progressive public officials, some academics, and even multilateral bodies such as the G-20 and IMF call for the elimination of so-called “fossil fuel subsidies.” These critics have alleged both the U.S. and global fossil fuels industry benefit by subsidies from U.S. and international governments, when the reality couldn’t be further from the truth. Traditional energy producers do not receive subsidies from the United States government – they take tax deductions much like virtually all other manufacturers.
The latest allegation comes from libertarian-leaning Cato Institute in a new analysis released in late December that looked specifically at Department of Energy (DoE) subsidy programs. The analysis’s author correctly pointed out a number of past and current DoE projects where taxpayer dollars have been wasted on mismanaged on ill-conceived projects. They are detailed in nine case studies to substantiate their case to get rid of all subsidies for solar, coal, wind power, and hydrogen fuel programs.
It’s no surprise that Cato wants to get rid of subsidies – they often distort the market and play favorites in the economy with preferential tax treatment – but Cato errs in lumping fossil fuels in this subsidy debate. And to be sure, the Cato analysis failed to substantiate its argument to take away so-called “subsidies” from fossil fuel companies.
For example, none of the analysis’s nine case studies assess any programs directed at oil and gas producers. In the conclusion, the author simply discussed the technology advances for hydraulic fracturing and horizontal drilling and their contributions to higher domestic production, a reduction of oil exports, and increase in exports. The only “argument” put forth is that, “the oil and gas revolution shows that businesses and markets can generate major innovations and progress with their own resources.” We agree, which is why the oil and gas sector has contributed to the U.S. economy with unmatched investment without government subsidies. The author did not cite any tax subsidies received by oil and gas sector for one simple reason: they do not exist. The continued effort to sweep up the oil and gas industry in the subsidy debate is irresponsible.
The public deserves clarification on the accurate definitions of subsidies and deductions. A subsidy is characterized by a direct payment from the government to a company in hopes of propping it up, such as what has been done with the solar industry. A deduction is in place to ensure that a company is taxed only on its real income, thus enabling businesses to write off legitimate expenses and calculate tax liability based on net income. The U.S. oil and gas sector only receives deductions.
As the incoming Trump Administration takes office, agencies have an opportunity to re-examine tax policy as it relates to the energy sector. They should cease government subsidies for failed renewable projects like Solyndra, which wasted taxpayer dollars because of political favoritism. Trump administration officials should also keep in mind the important substantive differences between subsidies and deductions, and should not attempt to repeal legitimate tax deductions taken by America’s economically productive traditional energy sector.
It is true, in certain parts of the world, some oil companies benefit from the consumption subsidies that are provided for fossil fuel consumption. It is important to separate these actual subsidies from cost of doing business.