Home Business Killing Fossil Fuel Subsidies Sounds Great - But What's A Subsidy?

Killing Fossil Fuel Subsidies Sounds Great – But What’s A Subsidy?

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There’s a terrible confusion in the minds of the woke and progressives about subsidies. Just in general, not those which apply to any one thing. For they never do quite manage to work out what a subsidy actually is.

Take this example of subsidies to fossil fuels:

One of the great ironies of climate politics is that America continues to subsidize — to the tune of billions of dollars a year — the very industries that are most responsible for the warming of the planet. Biden wants to put an end to that.

His American Jobs Plan, released last week, recognizes that if the US wants to hit decarbonization targets, and get climate change under control, cutting off government support for fossil fuels is a logical first step. The proposal takes aim at tax preferences, loopholes, and laws that allow fossil fuel companies to dodge costs and avoid cleaning up their pollution.

As part of the tax reform section of the plan, removing preferential treatment for oil, gas, and coal corporations would also free up federal dollars to support dozens of other climate initiatives, for which Biden has proposed around $1 trillion in investment.

Well, yes, OK, getting rid of subsidies sounds like a good idea. Level playing fields and all that. But this does then depend upon what it is that we’re going to consider as a subsidy. Which brings us to this:

That first one, intangible drilling cost deduction. What TF’s that?

Intangible drilling costs are one of the largest tax breaks available specifically to oil companies, allowing companies to deduct most of the costs of drilling new wells in the United States.

In order to determine taxable income, U.S. businesses can normally deduct expenses from revenues so they are only taxed on profits. Under normal income tax rules, a company that pays expenses in order to make future profits would need to deduct the expenses over the same time period as profits. The costs for drilling exploratory and developmental wells would need to be deducted as resources are extracted from the well.

The break for intangible drilling costs (IDCs) is an exception to the general rule. Independent producers can choose to immediately deduct all of their intangible drilling costs. Since 1986, corporations have only been able to deduct 70% of IDCs immediately, and must spread the rest over 5 years.

OK, so there’s a timing issue there, which has an impact upon capital requirements. But the basic idea is that you get to deduct your costs before you calculate your profits which are then taxed. This isn’t any different from any other form of business then – except in that matter of timing.

But have they included the benefits of the timing change? Nope, they’ve included the entirety of the deduction itself. They’re lying – or so grossly confused as to amount to the same thing.

Last in first out accounting doesn’t matter a damn. Changing it would make a difference, yes, but then using any other system and then changing it to this would as well. But any of the possible alternatives – last in last out perhaps – makes no difference to the tax bill over time. It is, at best, a timing issue.

MLPs corporate tax exemption is truly weird. Partnerships – of any type – do not pay the corporate income tax. Investors instead pay the individual income tax on their share of the profits. That a partnership in oil and gas doesn’t pay the corporate income tax is not a subsidy, it’s just the way that partnerships are taxed.

And so on through the list of “tax breaks”. They’re not tax breaks in the way that they’re counting them.

Which does lead to the question – what the hell are they doing?

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4 COMMENTS

  1. what the hell are they doing?

    Lying to discredit the policy in the minds of people who are only half-reading the story.

    Although it’s in Vox, so it is just as likely that the person writing the story is too thick to understand the topic and too lazy to call someone and have it explained.

  2. At one time, the US tax code included a feature called the “depletion allowance”. It could fairly be called a subsidy. It has been off the books for decades. The crazies on the left just shifted their same old arguments to other provisions of the tax code. It makes no more sense than the global warming hysteria.

  3. Even Bjorn Lomborg got knied up in tots over FF subsidies. With few exceptions, world-wide governments raise huge amounts of revenue by taxing every liter of petrol/gasoline sold. A notable outlier being Venezuela, only there’s no gas to sell. End the “subsidies” and the price would double.

  4. In the UK, domestic power supplies are subject to VAT at 5% rather than 20% (for the rather good reason that we prefer that the poor not freeze to death). In greenspeak (a close relative of doublespeak) this constitutes a 15% ‘subsidy’.

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