President Joe Biden is proposing to eliminate more than a dozen tax breaks for fossil fuel companies in an effort to align the tax code with his aggressive climate regulatory agenda.
It’s a welcome move for environmentalists and Democrats, who have long called for an end to fossil fuel subsidies. In fact, a clean energy tax proposal advanced by Democrats on the Senate Finance Committee late last month targets many of the same favorable provisions for oil and gas companies as Biden.
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However, oil and gas groups say removing those tax provisions would be a huge blow to the industry, especially for smaller producers operating on thin profit margins. The effect would be even greater when combined with regulatory moves such as Biden’s leasing pause and other budgetary fiscal provisions that propose raising taxes on fossil fuel companies, according to the groups.
“It’s, by our calculation, a $143 billion targeted tax increase on our industry, which is the largest offered by any president in their budget proposal by far,” said Aindriu Colgan, tax and trade policy manager at the American Petroleum Institute.
“It’s roughly six times as much as all of the net corporate tax cuts in the [Tax Cuts and Jobs Act] combined,” he added, referring to legislation passed during the Trump administration that slashed the corporate tax rate.
Biden’s fiscal year 2022 budget request would scrap 13 tax provisions specifically benefiting the fossil fuel industry. Overall, the Treasury Department estimates eliminating the provisions would save the federal government $35 billion over 10 years.
“These oil, gas, and coal tax preferences distort markets by encouraging more investment in the fossil fuel sector than would occur under a more neutral tax system,” the Treasury Department said in a document explaining the budget’s revenue proposals.
The agency added the market distortion is “detrimental to long-term energy security and also inconsistent with the Administration’s policy of supporting a clean energy economy, reducing our reliance on oil, and reducing greenhouse gas emissions.”
The elimination of the fossil fuel tax provisions is part of Biden’s proposal to sharply increase spending to curb climate change as part of his infrastructure plans and the broader budget. That includes extending and expanding tax incentives for renewable energy, carbon-free nuclear power, carbon capture and storage, and other clean energy technologies.
Environmentalists and some environmental economists see eliminating the fossil fuel tax breaks and bolstering clean energy tax incentives as two sides of the same coin.
The fossil fuel tax breaks were “designed for a time period when it was considered in the national interest to promote more fossil production domestically for national security reasons,” said Matthew Kotchen, a professor of economics at Yale University.
For example, some of the provisions in question have been in the tax code for around 100 years.
“The world has changed. Are those actually where we should be creating these additional incentives?” added Kotchen, a former deputy assistant secretary for environment and energy at the Treasury Department in 2013. “In the context of climate change and public health, it makes sense to think about phasing those out.”
Kotchen added that fossil fuel companies also receive a significant amount of “indirect” subsidies by not accounting for the environmental and public health costs of burning their products. He estimated those indirect benefits to be $62 billion each year, far more than the revenue estimates included in Biden’s budget proposal.
Overall, energy economists say eliminating the provisions will have a fairly minimal effect on overall U.S. oil and gas production.
Gilbert Metcalf, a professor of economics at Tufts University, cited an analysis he conducted in 2016 that found removing the favorable tax treatments would reduce domestic oil production by 4%.
“If environmental groups are saying this is going to be a nail in the coffin for fossil fuels that helps us de-carbonize the economy, that’s simply not the case,” said Metcalf, who served as deputy assistant secretary for environment and energy at the Treasury Department in 2011 and 2012. “On the other hand, if you hear the industry groups saying this will just absolutely decimate the industry, that’s also not the case.”
Metcalf’s analysis also found removing these tax provisions would have only modest effects on gasoline, oil, and natural gas prices.
Industry groups, however, say removing the tax breaks will hamper domestic production and create challenges for oil and gas companies — especially smaller, independent producers that have limited streams of revenue.
“What is absolutely without a doubt is that passing this budget, regardless of company size or structure, is going to fundamentally disadvantage America’s standing in the global energy space,” said Ryan Ullman, vice president of government relations and political affairs at the Independent Petroleum Association of America. “We are going to produce less oil and gas.”
Lee Fuller, IPAA’s officer of environment and general strategy, added that while larger integrated oil companies have several revenue streams, including refineries and chemicals, smaller producers don’t and thus rely more heavily on the tax breaks that help them recoup their expenses more quickly.
“Independent producers’ revenue comes from the wellhead. You sell your oil and gas. That’s where you get your money,” Fuller said.
A handful of the tax provisions Biden is targeting would have a more outsized effect.
For example, Biden proposes eliminating oil and gas companies’ ability to expense so-called “intangible drilling costs,” such as labor costs and developing a well site, that aren’t recoverable in the year those costs are incurred. The Treasury Department estimates the change would save the government $10 billion over a decade.
Scrapping another provision, known as percentage depletion, would save the government $9 billion over 10 years, according to the Treasury Department’s estimates. That provision allows producers to recoup costs based on how depleted the resource is at a particular drilling site, which is predominantly used by small, independent producers and royalty owners.
However, there’s no guarantee that Biden will be able to get his budget proposal through Congress. Already, Republican senators balked at the similar plans from Senate Democrats to scrap many of these fossil fuel provisions, calling it an attack on U.S. oil and gas production.
Nonetheless, environmentalists say they feel more optimistic than ever that the time is ripe for these provisions to end. By putting these proposals on the table, Biden is making it possible for them to end up in an eventual infrastructure or budget deal, Metcalf said.
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“This administration is really willing to spend political capital on advancing solutions to climate change,” said Andrew Logan, senior director of oil and gas at the sustainable investment group Ceres.
“This is the first time in my memory that there’s a chance of moving some of these balls down the field, which given how long they’ve been around, is a pretty big deal,” he added.
