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Swapping Tax Breaks: From Oil to Renewables

February 26, 2008 - by Donny Shaw

Congressional Democrats are going to try one more time to end what they see as “unnecessary subsidies to Big Oil companies making record profits.” Eliminating the manufacturing tax credit for major U.S. oil and gas companies has been a priority for congressional Democrats since taking control of Congress last January. They tried to move a bill last year that would have ended the tax breaks, but the provision was stripped by unanimous opposition among Senate Republicans. Tomorrow they will bring the same provision back to a vote in the House. But like last time, it’s expected to pass there easily only to face insurmountable opposition when it moves into the Senate.

In the Democrats’ new bill, repealing the roughly $18 billion in oil company tax breaks would be used to fund tax breaks for a wide range of renewable energy programs. The programs include tax credits for renewable energy producers, residential energy efficient properties, making energy efficient commercial buildings, buyers of plug-in hybrid vehicles, and more. You can see a rundown of the programs that would be funded on the website of Majority Whip Jim Clyburn.

The controversial bit in the bill is, of course, eliminating the tax breaks for the oil and gas industry; not the new (or extending existing) tax breaks for renewables. Here are some of the key arguments wrapped up in that debate:

In a joint statement, Speaker Nancy Pelosi (D-CA), House Majority Leader Steny Hoyer (D-MD), and Ways and Means Committee Chairman Charles B. Rangel (D-MI) say that it’ll benefit the consumers:

>Already pinched at the pump, American families are now feeling the effects of higher energy prices throughout the economy. This legislation is another critical step in a series of concrete actions this Congress is taking to address soaring energy costs, grow our economy and create new jobs, strengthen national security, and begin to reduce global warming.

Rep. Pete Sessions (R-TX) sees the Democrats’ proposal as doing just the opposite: raise energy prices and increase dependence on foreign oil:

>Rather than simply providing additional incentives for renewable energy research and development, this legislation penalizes energy producers—a cost which will inevitably be passed along to energy consumers through even higher prices for gasoline and home heating.
>Simply put, America cannot tax its way to lower energy prices and energy independence. If America is to achieve energy independence, Congress must offer tax incentives for domestic production of traditional and alternative energy sources—not tax increases and government intervention at the expense of the American people.

The Congressional Joint Economic Committee conducted an analysis (pdf) of the tax proposal and determined that it would not raise energy prices in either the short or long run:

>In the short run, these producers will continue to produce where the marginal cost of extracting (or refining or transporting) the next unit of crude oil (or natural gas) is equal to the price of crude oil (or natural gas). While an increase in the marginal income tax will raise average
costs of engaging in the activity, it will not affect the short-run marginal cost. In the short run, firms make production decisions based only on marginal costs.
>In the long run, the removal or modification of the tax deduction is unlikely to have any effect on consumer prices for oil and gas. Oil prices are more than three times higher than they were when the tax deduction was implemented in 2004 – and those high prices are an incentive for investors to continue to invest in oil and gas companies.

The Independent Petroleum Association of America see the Democrats’ push to end the tax breaks for their industry as primarily a matter of convenience:

>"First of all, remember that this discussion is really not about oil and gas profits. It is simply about money. The new party in power has an agenda which includes such things as a heavy emphasis on subsidized renewable energy, and under the new “Pay As You Go (PayGo)” system they must find offsetting sources of revenue. To them it is logical that one segment of the energy industry should “pay” to subsidize the development of another."

And Finally, in an article dating from the Democrats’ first attempt at ending the tax breaks, the New York Times reported on an Interior Department study showing that the tax breaks have not been effective at encouraging domestic oil exploration:

>The report predicted that the current incentives would lead to the discovery of only 1.1 percent more reserves than if there had been no incentives at all. Total oil production from 2003 to 2042 would be about 300 million barrels more, or less than 1 percent, than it would have been anyway. Natural gas production would be 0.6 percent greater than it would have been otherwise.
>But the cost of those royalty incentives would be high: about $48 billion less in royalty payments over the 40-year period. That loss would be offset by a slight increase in the prices that companies pay when bidding for leases in government auctions, but analysts said the net cost would still be above $40 billion.

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