President Obama recently relaunched his crusade to wipe out the “tax breaks” afforded to American oil companies. This time, he unleashed some of his most divisive and aggressive rhetoric on the subject yet, telling Congress it can “stand with big oil companies or... the American people.”
“I think it’s time [oil companies] got by without more help from taxpayers,” the president added.
His words followed a measure introduced by Senate Democrats to dramatically raise the tax burden on oil companies while creating new credits for so-called “renewables.” Ultimately, the legislation narrowly missed the 60 votes needed to advance. But it’s now crystal-clear that the Democratic Party, from the top down, is committed to turning anti-oil rhetoric into policy reality.
The problem is their sales pitch to the American people rests on a lie. Yes, a lie.
Over and over, Democrats talk about huge “subsidies” – as if taxpayers are signing billion-dollar checks to oil and gas companies. But oil companies don’t get subsidies. Rather, like every other business, they are allowed to take tax deductions for the expenses they incur.
A tax deduction and a government subsidy aren’t the same thing. When politicians use the terms interchangeably, many Americans are deeply misled.
Oil company tax deductions aren’t the product of special favors. They are the kind of standard relief afforded manufacturers, mining companies and other businesses to help defray the basic costs of operations. Oil companies can deduct their expenses for things like equipment purchases and rig-technicians’ salaries. The point of these deductions – as for any other industry or individual – is to ensure taxes are only levied on income after expenses.
Oil companies can also deduct expenses related to exploration or development. The idea is to provide an incentive to take on the often substantial risk of trying to find new energy sources. When these efforts are successful, the energy market expands, prices go down, and America moves that much closer to true energy independence.
But even these kinds of deductions aren’t unique to energy companies. There are many provisions in the tax code meant to encourage certain kinds of behavior. Mortgage deductions reward home ownership. There are special tax benefits for the money deposited into an individual retirement account or 401(k).
Overall, the oil and natural gas industry benefits from about $2.8 billion in tax deductions. And that’s actually a tiny price to pay for the massive benefits the sector generates for the rest of the economy.
During the past five years, through the thick of the recession, the oil and natural gas industry has added 160,000 new jobs. These firms now employ more than 9 million people. And 2011 saw higher domestic oil production for the third year in a row.
Now, there are players in the energy sector that do get federal subsidies, and they are massive. They’re the “alternative energy” companies the White House is so fond of. The wind and solar sectors alone take in $12.5 billion annually in direct subsidies.
Initially, this massive government support was justified on the grounds that “clean tech” was an infant industry that needed some help to start competing with traditional energy sources. But we’re now years and years into shelling out tens of billions in taxpayer dollars – in return for very little in the way of innovation or self-sustaining jobs.
Today, each megawatt of solar energy is produced with a stunning $776 in investment and production tax credits. For wind power, it’s $56 per megawatt. That’s a huge public expenditure for not much energy production.
Worse, despite the public largess, some of these clean tech companies have been based on business models so flawed they have already gone under. Solyndra, the solar panel manufacturer that went belly up last year, left American taxpayers on the hook for half a billion dollars in unpaid loans. Among other costly bankruptcies was Beacon Power, an electricity grid utility company that folded in October.
Oil and natural gas companies aren’t getting subsidized – they’re benefiting from the same, reasonable cost-of-operation deductions afforded to all kinds of industries.
The real subsidies – and the real scandal – are to be found in “renewable” energy, which has taken in tens of billions in direct government payments over the past few years, but still has little to show for it.
(Bernard L. Weinstein is associate director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business and a Fellow with the George W. Bush Institute.)