March 12, 2008

It's the tale of two philosophies. Progressives are favoring more generous government subsidies for sustainable fuel production while conservatives are leaning the other way and supporting the current tax breaks given to oil companies.

The debate now rages in Congress where the U.S. House voted for the third time in more than a year to limit tax credits and raise additional taxes on oil companies. Members would then take the $18.1 billion in new revenue and shift that money over a 10-year period into renewable energy and energy conservation causes.

Republicans generally oppose the increased taxes, saying that the demand for energy is rising and that the country needs to do more to encourage oil and gas development. Any tax hike, they add, would deter production, diminish supply and thereby increase prices to consumers. Democrats, on the other hand, support the idea. They point out that the oil industry last year earned $123 billion in profits and argue that it does not need those tax incentives to drill. With record high oil prices hitting $109 a barrel, they are already motivated to maintain production.

We have seen no indication that Republican opposition to the oil and natural gas tax hikes have abated, making the offsets the Democrats seek for the renewable programs the albatross on the bill,'' said Christine Tezak, regulatory analyst for Stanford Group.

The specific provisions in the House bill would limit the tax credits given to oil companies that emanates from a measure enacted in 2004. That law gives those breaks to domestic manufacturers to help them compete with foreign businesses. The legislation would also impose new taxes on oil revenues earned abroad -- money that is currently taxed by the host nations where those companies do business.

Last year, a similar measure passed the House and won a majority in the Senate, although it could not win the necessary 60 votes to stop a filibuster. Even if the Senate could sustain such stalling tactics now, President Bush has vowed to veto the measure, saying that it would unfairly target one industry. Nevertheless, the issue is certain to become hot on the presidential trail and one that will assuredly capture the attention of the American people who have paid up to $3.30 for a gallon of gas in recent weeks.

Under the bill, the five largest oil companies would pay $1.8 billion a year in additional taxes, according to the Joint Committee on Taxation. The money would then be used to provide tax breaks for wind and solar, which includes the long-term extension of production tax credits and tax incentives, respectively, scheduled to expire by year-end. It would also extend $300 tax credits to homeowners who make their residences more energy efficient.

"Big oil companies must contribute to these efforts by forgoing $1 billion in tax loopholes, which is like couch change compared to their $120 billion profits last year," says Daniel Weiss, head of the Center for American Progress.

Industry Subsidies

Neither the oil industry nor its supporters are cowering. Citing Tax Foundation, they say that the average tax rate for major oil and gas companies is greater than the average of 32.3 percent paid by all manufacturers. Tax increases would serve to discourage domestic oil and gas drilling and hence decrease supplies. Because demand is expected to continue increasing, prices would rise.

Redistributing the tax allocation is unwise, critics add. Renewable energy fuels provide about one or two percent of electric generation in this country. Any increased subsidies would divert scarce resources away from traditional fuel sources that have a far more prominent role in our society.

Those skeptics also say the economics won't add up, noting that windfall profit tax imposed on oil firms in 1980 during the Carter administration and subsequently withdrawn during the Regan era in 1988 is a perfect example. Ben Lieberman, senior analyst with the Heritage Foundation, says that during that time period domestic oil production dropped 3-6 percent while oil imports jumped from 8 percent to 16 percent.

"As with those tax past measures, there will be no real effect," adds Tony Kolton, chair of energy advisor Logical Information Machines. "This is merely political window dressing and is meant to show U.S. taxpayers that the government is doing something."

House Democrats disagree that they are posturing, arguing that exorbitant oil prices in combination with record profits mean that the oil companies no longer need the tax breaks. If money were diverted to alternative energy causes, they say it would spur production and provide businesses with the long-term certainty they need to make expensive investments. The overriding goal, they conclude, should be to ease the dependence on fossil fuels and to make a transition to cleaner fuels.

While relatively young, clean tech industries are one of the bright spots in the American economy, providing 116,000 jobs and $19 billion in investment in recent times. The U.S. wind industry, for example, expanded by 45 percent in 2007 and contributed about 30 percent of new power generating capacity last year. But Congress's delay in extending all renewable electricity credits, which expire at the end of this year, is now causing investors to defer investment decisions.

In the short run, lawmakers will bargain and allow the production tax credits for renewables to be extended in exchange for dropping their efforts to increase oil company taxes. But with oil prices anticipated to remain in the $100 a barrel range and with current annual profits at $123 billion, they will be correct to re-evaluate which segments of American economy are given the most favorable tax treatment.

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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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