The Zombies of the U.S. Tax Code: Why Fossil Fuels Subsidies Seem Impossible to Kill

March 18, 2024

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by Lisa Friedman (New York Times) For the fourth year in a row, President Biden is trying to eliminate federal tax breaks for coal, oil and gas companies. But fossil fuel subsidies have proven difficult to stop. -- ... Mr. Biden’s budget request to Congress this week was his fourth attempt to eliminate what he called “wasteful subsidies” to an industry that is enjoying record profits.

“Unlike previous administrations, I don’t think the federal government should give handouts to big oil,” Mr. Biden said after his inauguration. His new budget proposal calls for the elimination of $35 billion in tax breaks that would otherwise be provided to the industry over the next decade.

Mr. Biden’s wish is opposed by the oil industry, Republicans in Congress and a handful of Democrats. In Washington, it seems, oil and gas subsidies are the zombies of the tax code: impossible to kill.

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The oil and gas industry enjoys nearly a dozen tax breaks, including incentives for domestic production and write-offs tied to foreign production. Total estimates vary widely; environmental groups take a broad view of what constitutes a subsidy while the industry hews to a more narrow definition. The Fossil Fuel Subsidy Tracker, run by the Organization for Economic Cooperation and Development, calculated the total to be about $14 billion in 2022.

The oldest, known as “intangible drilling costs,” was created by the Revenue Act of 1913 and was aimed at encouraging the development of U.S. resources. The deduction allows companies to write off as much as 80 percent of the costs of drilling, things like employee wages and survey work, in the first year of operation, even before producing a drop of oil.

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Another subsidy, dating from 1926 and known as the depletion allowance, initially let oil companies deduct their taxable income by 27.5 percent, a number that seemed strangely specific.

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The allowance was eliminated in 1975 for large producers and reduced for smaller companies, which are still allowed to deduct 15 percent of their revenue from their taxable income.

Early on, lawmakers justified the deductions by saying they would help attract investors to oil drilling, which could be a risky venture. After all, not every well strikes oil.

Today, Exxon Mobil and Chevron, the largest U.S. energy companies, are enormously profitable. Last year, American companies pumped 13 million barrels each day on average, a record that had made the United States the largest crude oil producer in the world, according to the U.S. Energy Information Administration. The country is also the world’s leading exporter of liquefied natural gas.

The oil and industry is expected to reap $1.7 billion in 2025 from the intangible drilling tax break, and $9.7 billion over the next 10 years, according to the White House. It is expected to realize $880 million in benefits from the depletion allowance tax break in 2025, and $15.6 billion by 2034.

Instead of investing in their businesses, the oil and gas companies have poured profits into “stock buybacks, mergers, and acquisitions that benefited executives and wealthy shareholders,” the Biden administration said on a fact sheet accompanying the budget proposal.

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The debate over semantics aside, the result is that the government is helping to artificially lower the price of producing oil, gas and coal in a way it does not do for other manufacturers, economists said.

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Others note the irony of continued government support for fossil fuels at a time when scientists say nations must rapidly transition away from oil, gas and coal to cut the carbon emissions that are driving climate change. READ MORE

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Excerpt from Wall Street Journal: Biden has presided over record U.S. energy production and exports, and oversaw the start of several major pipelines and infrastructure projects. There is also broad support for the Inflation Reduction Act, which contains enormous tax credits for clean-energy projects, including those favored by the industry such as carbon capture and hydrogen production.

For both of the top presidential candidates this year, there is a gulf between their campaign rhetoric and the governing reality. Biden stresses his green agenda and often criticizes the industry, but his administration is relatively pragmatic on many issues, oil executives say. Whereas Trump’s “drill, baby, drill” slogan is a regular part of his stump speech, his first administration was often chaotic and lacked regulatory thoroughness, which stalled some oil-and-gas projects in court. Trump has also been sharply critical of the industry-popular IRA.

Oil executives said John Podesta, Biden’s point person on implementation of the IRA, is now intensely focused on bringing clean-energy projects to life and often discusses the effort with big fossil-fuel producers.

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Occidental CEO Vicki Hollub said she has enjoyed an open dialogue with Podesta, and Energy Secretary Jennifer Granholm. Hollub said she had always appreciated Biden’s push to reduce greenhouse-gas emissions.

“We support those goals, and we want that to happen,” she said. “I think the [Energy Department] has been one of the agencies that’s been very open in wanting to help move things along.”

Several major energy projects that stalled in court during the Trump years moved forward under Biden, such as the Dakota Access Pipeline and the Mountain Valley Pipeline. The Biden administration approved ConocoPhillips’ controversial Willow project in Alaska and a Gulf Coast oil-export terminal capable of handling supertankers, only the second such facility in the region.

“No one has done more damage to the American oil-and-gas industry than Joe Biden,” said Karoline Leavitt, a spokeswoman for Trump’s campaign. “President Trump made America a net exporter of energy for the first time because he cut red tape and gave the industry more freedom.”

Complicated politics

Fossil-fuel politics are tricky for Biden. Many in the Democratic Party seek a rapid move away from oil and gas to curb climate change, but Biden also needs to attract moderate voters in key swing states, including Pennsylvania, where fracking is an economic boon.

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U.S. Rep. Lizzie Fletcher, a Democrat from Houston, has helped nurture relationships between energy companies and her party. She said they are making progress in collaborating to shape the IRA and provisions around methane emissions.

“You hear the Republicans all the time saying the administration is so terrible for domestic production of oil and gas, and yet we are at a record peak of crude-oil production,” Fletcher said.

After extensive meetings with fossil-fuel interests, the Securities and Exchange Commission killed a proposed requirement for oil companies to report emissions stemming from customers using their products when the agency rolled out its new climate accounting rules last month.

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Officials have learned more about what it takes to bring low-carbon projects to fruition, and the myriad stakeholders involved, said Jeff Gustavson, who leads Chevron’s new energies business, which is investing in renewable fuel, hydrogen and carbon capture.

“Do the politics complicate that? Obviously. But we try to take the long-term view, and we’ve had constructive discussions and conversations,” Gustavson said. READ MORE