Debunking Democrats’ claims about fossil fuel tax breaks

Democratic presidential frontrunner Joe Biden hopes to pay for his version of the Green New Deal by eliminating the subsidies and tax breaks given to the fossil fuel producing industry.

His proposal states, “he will lead by example, with the United States cutting fossil fuel subsidies at home in his first year and redirecting these resources to the historic investment in clean energy infrastructure.”

Biden’s not alone. Former Texas Rep. Beto O’Rourke says, “we finally end the tens of billions of dollars of tax breaks currently given to fossil fuel companies.” And Washington Gov. Jay Inslee told National Public Radio he would “remove the giant subsidies from the oil and gas companies.”

In fact, the oil and gas “subsidies” they refer to are small compared to the renewable energy industry. In addition, most of them are widely claimed tax deductions available to many other industries.

The Congressional Research Service (CRS) released an updated report in March estimating the cost, or “lost revenue,” of the tax breaks available to all types of energy production.

According to CRS, “In 2017, the value of federal tax-related support for the energy sector was estimated to be $17.8 billion. Of this, $4.6 billion (25.8%) can be attributed to tax incentives supporting fossil fuels. Tax-related support for renewables was an estimated $11.6 billion in 2017 (or 65.2% of total tax-related support for energy). The remaining tax-related support went toward nuclear energy, efficiency measures, and alternative technology vehicles.”

But there’s more to the story, because fossil fuels deliver vastly more energy return than renewables. “In 2017, fossil fuels accounted for 77.7% of U.S. primary energy production. The remaining primary energy production is attributable to renewable energy and nuclear electric resources, with shares of 12.8% and 9.5%, respectively,” according to CRS. Wind and solar power only accounted for 3.6 percentage points of total energy production.

In other words, fossil fuels provide more than three-quarters of U.S. energy generation for one-quarter of the identified tax spending. Renewables provide about 13 percent of energy production but absorb two-thirds of the tax spending.

CRS refers to these tax breaks as lost revenue, an important point that may have been lost on some Democrats. It certainly seemed to be lost on Rep. Alexandria Ocasio-Cortez (D-N.Y.) when she criticized New York City for “giving away” billions of dollars to Amazon. 

A tax break is simply income a company (or a household) doesn’t have to pay taxes on. Oil and gas companies are not receiving a government check that can be diverted to subsidize renewable energy production. 

If renewable energy sources were to replace fossil fuels, which is most Green New Dealers’ stated goal, the current tax deductions the fossil fuel producing companies now receive would largely vanish. 

Yes, the value of those tax subsidies could be transferred to the renewables producers, but it wouldn’t be nearly enough because of the disparity between the percentage of subsidies that go to fossil fuels versus those going to renewables. 

The tax subsidies going to renewable-energy producers would have to increase by a factor of six, or about $70 billion, just to offset the lost production from the fossil fuel industry. And that’s in addition to the $11.6 billion renewable energy companies currently receive. 

But the actual cost would be much larger because of the lost corporate income taxes paid by the fossil fuel industry if those companies were producing little or no fossil fuels.

In short, the claim that repurposing the tax subsidies enjoyed by oil and gas producing companies to help pay the cost of renewable energy expansion is not just unrealistic, it’s flat wrong.

Moreover, as CRS points out, many of the estimated $4.6 billion in tax incentives claimed by the oil and gas industry are widely available to other industries. That is, they aren’t just for oil and gas.

For example, CRS says the “production activities deduction, before being repealed in the 2017 tax act, benefited all domestic manufacturers.”

In addition, the ability to issue tax-exempt debt, structure as a master limited partnership, or incentives to promote research and development are available to non-energy producing companies as well.

Of course, CRS is only tracking lost federal revenue. Many state and local governments also provide both direct and indirect subsidies to the renewable energy industry.

So, yes, the fossil fuel industry can claim tax deductions, which are much smaller than those enjoyed by the renewables industry and most of which are the same breaks made available to many industries. If Democrats want a piggy bank for their Green New Deal, they’ll have to look elsewhere.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.