Platitudes from Paris: The Energy Subsidy Edition

Last week in Paris, government leaders pledged to phase out billions of dollars in fossil fuel subsidies. This apparently grand gesture makes good headlines and quotable sound bites, yet it’s based on an erroneous assumption – that U.S. oil and natural gas companies receive massive handouts straight from the Treasury … straight from taxpayers.  This tired cliché has been around for so long that at this point, it’s recited as if it were a fact.   However, there’s another old saying that is quite accurate in this case: repeating something over and over again doesn’t make it true. 

So let’s again give a quick primer on the difference between a subsidy and a tax deduction.  A subsidy is a direct payment from the government to a corporation with the goal of propping it up or boosting its economic prospects.  On the other hand, a deduction enables a business to write off its legitimate expenses and calculate its tax liability based on net income.  For example, the Section 199 domestic manufacturer’s deduction is simply a cost recovery mechanism, something the U.S. tax code has long allowed – for a host of industries, including oil and gas.

This is not to say that there aren’t governments around the globe that heavily subsidize – in the proper sense of the word – oil and gas companies.  Many do, including Russia and Saudi Arabia.  However these are state-owned and it would therefore be incorrect to lump U.S. companies alongside these countries within the whole “subsidy” argument.

Instead of encouraging the businesses to stick it out here at home, some activists want to selectively repeal the few provisions that protect U.S. companies from overpaying their fair share of taxes—especially when it comes to traditional energy producers. A recent Oil Change International report, for example, claims U.S. oil and natural gas producers collect over $20 billion in national subsidies each year. This “publicly financed bailout,” the report states, amounts to “allowing fossil fuel producers to undermine national climate commitments, while paying them for the privilege.” Here again, the term “subsidies” is being misused.  

It’s curious, although unsurprising, that the leaders gathering in Paris made no mention of phasing out other policies that are in fact subsidies – think solar or ethanol.  But then again, those industries aren’t such inviting targets as oil and gas.

To truly have an informed debate on tax policy and the need for systemic reform, public officials must choose their words, and their proposals, carefully. It’s one thing to examine narrowly drafted tax-law provisions with an eye toward flattening out the tax base and lowering rates. It’s quite another to act punitively against economic sectors that are politically out of favor. Unless we understand this distinction, we will never get to where we need to be – ensuring American companies remain competitive on the global stage and here at home.