A Federal Tax Credit for Refineries Would Probably Be a Bad Idea

December 11, 2015

Senator Tom Carper has reportedly proposed a tax credit for oil refineries, as part of the ongoing spending bill negotiations. Such a credit would have several drawbacks: it would make the tax code more complex, reduce federal revenue, and subsidize certain businesses over others.

For some context: over the last few weeks, Congress has been negotiating over a spending bill to fund the federal government for fiscal year 2016. One sticking point in the negotiations has been efforts to end the ban on crude oil exports, which has been in place since the 1970s. Supporters of these efforts claim that the oil export ban hinders the economy; opponents cite environmental concerns. Either way, lifting the oil export ban would likely hurt U.S. oil refineries, because American-produced crude oil could then be refined overseas.

In response to the potential losses that American refineries might face from a repeal of the crude oil export ban, Senator Carper has issued a draft proposal for refinery tax credit. In a statement, Carper remarked, “If there is an agreement to lift the ban, I believe we should do what we can to ensure it protects our refineries, keeps fuel costs low, and makes long-term investments in clean energy and conservation.”

The most charitable justification for Senator Carper’s proposal is the idea that the federal government should compensate individuals and businesses that are harmed incidentally by changes in policy. If so, a refinery tax credit would be a form of transition policy – a measure to minimize the costs of transitioning from one law to another. On the other hand, if you view the oil export ban as a 40-year regulatory subsidy towards the domestic refinery industry, it’s harder to make the case for continuing federal assistance to refineries in the form of a tax credit.

Even if policymakers were interested in providing federal assistance to U.S. refineries, the tax code is not the place to do it. The federal tax code is already filled with over 150 credits, deductions, and other preferences towards specific industries and activities; adding another targeted credit would make the code more complex and harder to administer.

In addition, the proposed refinery tax credit would benefit some refineries over others. According to the draft legislation, the credit only applies in full to oil refineries that are not connected to pipelines over 35 miles long. As Politico has noted, this is a measure to ensure that the credit is targeted to oil refineries in the Northeast, which largely receive crude oil by rail or by shipping. Subsidies for some companies over others are almost never good tax policy.

Spending negotiations are tough, and there is inevitably a lot of horse-trading on all sides. But lawmakers should keep the principles of sound tax policy in mind, and should avoid filling the tax code with more complex, industry-specific provisions.


Topics


Related Articles