We Won’t Win the Future By Attacking Oil Companies

January 26, 2011

In last night’s State of the Union address, President Obama called for reform of the corporate income tax for all businesses, but also singled out the oil industry for tax code punishment:

We need to get behind this innovation. And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. (Applause.) I don’t know if — I don’t know if you’ve noticed, but they’re doing just fine on their own. (Laughter.) So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.

Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling. So tonight, I challenge you to join me in setting a new goal: By 2035, 80 percent of America’s electricity will come from clean energy sources.

There are a few issues with this statement – the first being that there’s a difference between tax provisions or exemptions which benefit companies who happen to be in the oil business and intentionally giving those companies “billions in taxpayer dollars.” Even the expenditures which do qualify as subsidies, however, are small compared to those that are already going to otherwise unprofitable alternative energy sources like wind and solar.

In a November 2010 study on subsidies and taxes in the oil industry, Tax Foundation President Scott Hodge found that annual subsides (as defined by the International Energy Agency) for renewables were more than four times larger than those for fossil fuels. Also left out of State of the Union rhetoric is any mention of the amount of taxes paid by oil companies – over $1 trillion in sales and excise taxes between 1981 and 2008 (the timespan recently studied by the IEA).

Worse still is the implication that the tax code should be used to punish or reward particular industries based on their political popularity, or that more profitable companies have some responsibility to subsidize their less successful rivals. The President’s line about how the industry is “doing just fine” was a joke, but nonetheless embodied a very serious and unfunny strain of economic thought based on envy and suspicion about large business entities.

This hostility has motivated proposals not just to eliminate any preferential treatment the industry enjoys, but to keep oil companies from taking advantage of industry-neutral provisions. Scott writes:

The Obama Administration has devoted considerable effort in policy proposals and public relations to eliminate not only the few subsidies that fossil fuel providers currently receive, but to withhold from them the ordinary tax treatment of business expenditures that many corporate taxpayers benefit from.

It’s certainly possible that the revenue-neutral corporate tax reform that the President outlined last night might have the effect of eliminating some provisions that are favorable to oil companies, but that should be incidental to the overall effort, not the goal.

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