Presidential hopeful Jeb Bush has plunged boldly-or accidentally-into the treacherous mists of energy taxation in a manner potentially useful to the oil and gas industry. Responding to questions at an Americans for Prosperity event in Manchester, NH, he said, "I think we should phase out, through tax reform, the tax credits for wind, for solar, for the oil and gas sector, for all that stuff."
If Bush had stopped there, a literal interpretation of his words would bode well for the oil and gas industry but ominously for renewable energy. Without tax credits, power from wind and sunshine can't compete at meaningful scale in the market for electricity. And the only tax credits available exclusively to oil and gas-for enhanced recovery and for production from marginal wells-expire when prices of crude oil and natural gas exceed thresholds below their current levels.
All subsidies
What Bush apparently meant, however, was not just tax credits but all subsidies.
"So you'd like to get rid of all fossil fuel subsidies?" asked a young man identified in news reports as an environmental activist. "That's so good to hear. I'm really excited for that."
Bush responded: "All of them-wind, solar, all renewables, and oil and gas." Insisting markets should make energy decisions, he said, "I don't think we should pick winners and losers."
Probably without knowing it, the Republican former governor of Florida created the occasion for an overdue look at what constitutes an energy subsidy. The default assumption of politics, enthusiastically asserted by promoters of renewable energy and amplified by slavish media, is that oil and gas receive tax subsidies worth tens of billions of dollars each year and that alternatives deserve compensatory treatment.
Yet what, exactly, are those energy subsidies said to flow so lavishly to Big Oil?
One big-dollar tax category included in Energy Information Administration analyses of energy subsidies-and targeted by the Obama administration for repeal-is "expensing of exploration and development costs," especially intangible drilling costs (IDCs). These provisions allow a taxpayer to deduct costs immediately rather than through serial charges. For any specific property, the taxpayer benefits from the time value of money-but not from diminished tax liability over the life of the revenue stream. IDC expensing is unique because drilling incurs a uniquely high proportion of costs unassociated with physical assets with depreciable value. But being unique doesn't make IDC expensing a subsidy. Furthermore, timing preferences aren't nearly as valuable to the taxpayer as outright tax credits, such as those available to solar and wind.
Another tax mechanism reported by EIA with high annual value is percentage depletion, available only to individuals and small producers. The alternative is cost depletion, the annual calculation of which can strain small taxpayers. Technically, percentage depletion becomes a subsidy when, for a specific property, total charges exceed tax basis. This happens, especially for old producing assets. But it doesn't represent a fat subsidy for Big Oil, as often is alleged. Major oil companies haven't been able to use percentage depletion since the 1970s.
Not included in EIA's report of subsidies but routinely attacked as special favors to oil and gas companies are several mechanisms that happen to be available to other industries. These include last-in, first-out inventory accounting; tax treatment of foreign income by dual-capacity taxpayers; and the domestic manufacturer's deduction.
Intended conversation?
Only Bush knows if he hoped to inspire discussion about these complexities when he opined first on tax credits, then on subsidies for all energy forms. Whatever his intent, that conversation would be enlightening if activists stayed quiet long enough to let it proceed and if enough impartial observers remained engaged through all the tax arcana.
Honest study would reveal that tax provisions available to oil and gas companies don't represent the rich and expendable handout industry detractors make them out to be. Then another tall tale could fade from American political mythology.
