May 12, 2011 | WebMemo on Energy and Environment
In his fiscal year (FY) 2012 budget request, President Obama proposed to end subsidies for oil companies by eliminating tax breaks, including accelerated depreciation options. A growing number of policymakers have echoed that call.
Though the President’s anti-subsidy rhetoric is on track, there are several fundamental problems with the Administration’s crusade. The President overreaches on what truly is a subsidy for oil and ignores the fact that the government does far more to hurt oil production than help it. He singles out the oil industry, which already faces a higher marginal tax rate at 41 percent compared to 26 percent for the rest of businesses in Standard & Poor’s 500.
The President attacks oil subsidies while continuing to push for subsidies for renewable fuels, electric vehicles, wind, solar, clean coal, and even natural gas. According to the Congressional Research Service, President Obama’s tax hikes on the oil and gas industry proposed in his FY 2012 budget would increase the price of oil and gas for American consumers. A much better policy for taxpayers and consumers would be to define subsidies accurately and then remove all energy subsidies. Any repeal of tax breaks should be offset with a broad tax cut to avoid any net tax increase.
Oil Subsidies That Should Be Removed
First, let’s take a look at oil subsidies that are obvious and unnecessary. Congress should eliminate the following subsidies:
Applied research of any kind—not just oil research and development—is better left to the private sector. The private sector should not be subsidized because of market conditions, as happens with the so-called safety-net tax credits that kick in if the price of oil falls below a certain level.
Broadly Available Tax Provisions Are Not Oil Subsidies
In many cases, what the President and anti-oil crusaders label an oil subsidy is neither a subsidy nor a tax treatment specific to the oil and gas industry. These are broad tax policies that apply to many industries. When the Administration takes aim at these provisions specifically in the oil and gas industry, it is essentially a targeted tax hike. These provisions include:
Immediate Expensing Should Be Complete and Permanent
Another non-subsidy target of the Administration is oil companies’ ability to expense capital costs in the year of the purchases.
Immediate expensing allows companies to deduct the cost of capital purchases at the time they occur rather than deducting that cost over many years based on cumbersome depreciation schedules. Expensing is the proper treatment of capital expenditures. Depreciation raises the cost of capital and discourages companies from hiring new workers and increasing wages for existing employees. Immediate expensing for all new plant and equipment costs—for any industry or type of equipment—would allow newer equipment to come online faster, which would improve energy efficiency and overall economic efficiency.
Even President Obama has championed temporary 100 percent expensing for qualified capital because it lowers the cost of investment. Congress should make immediate expensing permanently available for all business investments.
All companies, including oil and gas companies, should be able to expense their full capital costs immediately. Until that critical change in the tax code is made for all businesses, Congress should retain all provisions that move the tax code in the direction of expensing.
Special Tax Treatments That Deserve a Second Look
Special tax treatment can serve the same purpose as a subsidy by uniquely favoring the oil and gas industry. There are cases where this type of treatment should be considered carefully:
End Real Oil Subsidies, but Don’t Gratuitously Punish Companies
Ending all energy subsidies, including those for oil and gas, would be good for American taxpayers and consumers. However, Congress should not punish the oil and gas industry with targeted tax hikes, nor should it reward other parts of the energy industry favored by the Administration.
Immediate expensing is not a subsidy; it is good policy that can encourage new investments and benefit all businesses. There are, however, special treatments that should end. Congress should repeal passive loss limitation exemptions and enhanced oil recovery and marginal well production tax credits. Congress should then use any resulting revenue to reduce tax rates and eliminate DOE spending for fossil fuel research.
Finally, Congress and the Administration should also remove the regulatory shackles that hinder additional drilling for oil and gas onshore and offshore—work that is vital to ensure access to abundant, affordable energy for American families and businesses.
Nicolas D. Loris is a Policy Analyst and Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Robert Pirog, “Oil and Natural Gas Industry Tax Issues in the FY2012 Budget Proposal,” Congressional Research Service Report for Congress, March 3, 2011, at http://www.nationalaglawcenter.org/assets/crs/R41669.pdf (May 13, 2011).
Press release, “Obama Administration Releases Report Outlining Benefits of Expensing Proposal in Encouraging Business Expansion, Hiring Now,” The White House, October 29, 2010, at http://www.whitehouse.gov/the-press-office/2010/10/29/obama-administration-releases-report-outlining-benefits-expensing-propos (May 12, 2011).