Environmentalists are wrong on taxes

A new report from the Council on Foreign Relations is music to the ears of environmental activists. It claims to show that if the federal government ended its “preferential” tax treatment of the oil and gas industry, public revenues would jump by billions and climate change would slow considerably.

This is pure fantasy. The report’s methodology is fundamentally flawed, confusing tax deductions with subsidies and completely overlooking the vital role oil and gas plays in the American economy.

Subsidies are a direct transfer of money from the U.S. Treasury to a private company. American oil and gas companies receive zero — that’s right, zero — subsidies.

What these firms do receive, however, is the same tax treatment as all other businesses, which, in part, allows them to deduct certain operating expenses. This deduction is typically used to offset the substantial costs of drilling and preparing wells — and that’s a good thing. These deductions encourage energy companies to grow and create jobs.

And the biggest tax benefits aren’t going to Big Oil. Back in 1975, federal lawmakers partially repealed a tax code provision known as “Percentage Depletion,” which allowed fossil fuel producers to deduct the deprecation of their reserves.  Only small and independent operators are now allowed to make such write-offs. ExxonMobil, Shell, and other large oil companies cannot. Likewise, credits such as the Enhanced Oil Recovery Tax Credit and Well Tax Credit are almost exclusively used by small and mid-sized operations.

These facts have been lost on both the media, which regularly repeats the myth that energy companies receive special tax treatment, and the White House, which has long advocated for steep tax hikes on the energy industry.

If the CFR report informs policy and the federal government does indeed eliminate tax deductions for fossil fuel producers, the American economy would be deeply damaged. After a decade of steady growth, this sector now supports more than 9 million jobs.  It would contract under a heavy new tax burden, eliminating many of these positions and putting Americans all over the country out of work.

The CFR report also claims that ending energy tax “breaks” would help fight global warming, chiefly because it would afford the United States the moral standing needed to effectively pressure other nations to end their preferential tax policies and shrink their own fossil fuel sectors.

This claim ignores that fact that, counter intuitively, America is leading the world in emissions reductions thanks to the fossil fuel industry.

Thanks to the rapid expansion of America’s natural gas sector, electricity plants have switched from coal to gas. Largely because of this migration, America’s annual carbon emissions are now at a 20-year low.  What’s more, fossil fuel companies have poured billions into researching and developing carbon reduction technologies.  Since 2000, oil and gas companies have invested more than twice as much as any other industry in such technologies.

This Council on Foreign Relations study claims that oil and gas firms receive special public subsidies. That isn’t true. The sector simply benefits from the deductions afforded all other businesses. And these write-offs have helped the industry grow, create economic opportunity, and invest in clean energy technologies. The Council — and its activist allies — need to check their facts.