While the leading Democratic candidates duke it out over their policy differences, a rare point of agreement is an end to tax policies they decry as “fossil fuel subsidies.” Top candidates such as Joe Biden, Elizabeth Warren, and Bernie Sanders have all pledged an end to these so-called subsidies.
This sounds like a reasonable position: The federal government should not pick winners and losers in energy markets. But the policies which have been targeted as “fossil fuel subsidies,” however, aren’t subsidies at all. Rather, they’re about fair tax treatment for capital and investment, and the portions of the tax code in question benefit renewable energy industries as well.
Fossil fuel industries received $4.6 billion in tax incentives in 2017. These so-called subsidies, however, are largely provisions for the expensing of capital investment.
The tax code has an odd way of handling a business’s costs to calculate taxable income. Most costs are subtracted immediately, as they should be. But some, such as those for investments in capital, aren’t subtracted immediately. Instead, a portion is subtracted every year over a number of years, in some cases, as many as 39 years.
This matters a lot. If I offered you $1,000, would you rather have money now in one lump sum or money spread out in payments over the next five, 10, 20, or 39 years? You would want it now, understandably. Receiving $1,000 today is worth more than $1,000 in small chunks over the next several decades — not only do you avoid losing value from inflation, but you also have the opportunity to invest and grow this $1,000.
The tax code breaks up the investment into small chunks, which creates a bias. A company that invests in hiring a worker gets to deduct its cost immediately, but if that company invests in buying that worker a computer to be more productive, it’s penalized.
Treating capital investment differently than other costs is especially foolish because expensing investments provide an excellent “bang for your buck.” Investment drives economic growth, wage growth, and productivity growth. That’s why allowing expensing makes us all richer. Thankfully the GOP’s 2017 tax reform bill corrected this for many types of capital investment. Unfortunately, it did not do so permanently, and not for all investments.
Now, what does this have to do with fossil fuel subsidies? Many of these so-called subsidies are really tax provisions that try to correct for this structural imbalance by allowing oil and gas companies to deduct their capital investments immediately, as they should.
What’s important is that capital costs for fossil fuel companies tend to be a bit different than other companies. They invest by prepping a new drilling site or buying geological rights, things most firms don’t do. As a result, their capital investments are enumerated separately in the tax code. It looks like they’re getting a special benefit, but it’s exactly what the 2017 tax reform bill did for any number of other businesses, including renewable energy companies.
Ironically, it is renewable energy companies that often receive bona fide tax preferences. In addition to accessing cost recovery provisions for their capital investment, they receive credits for the energy they produce, something that fossil fuels don’t receive. Renewable tax incentives dwarf those received by the fossil fuel industries. Renewables received 65% of all energy tax incentives in 2017 while producing less than a quarter of our energy.
When Democratic candidates denounce the fossil fuel industry for its supposed subsidies and lavish government benefits, remember that not all specific tax provisions are the same. In the case of fossil fuel tax incentives, they aren’t subsidies at all — but rather a way to correct an inherent bias in our tax code faced by all businesses.
Nicole Kaeding is the Vice President of Policy Promotion with the National Taxpayers Union Foundation.
