Tillerson Errs on Tax Subsidies for Fossil Fuels

On Thursday, as part of the confirmation hearings for Secretary of State for the Trump Administration, Rex Tillerson, CEO of Exxon Mobil, appeared before the Senate Foreign Relations Committee.

Jeanne Shaheen (D -New Hampshire) asked Tillerson whether he thought subsidies given to the oil and gas industry were still necessary, given the record profits that the industry is now earning: "At this time, when many of our oil companies, particularly large oil companies like Exxon, are reaping very good profits, do we really need to continue these subsidies?"

Shaheen noted that in 2009 the G20 (the Group of 20 industrialized nations) had pledged to phase out fossil fuels and asked if Tillerson and the Department of State would fulfill that pledge.

Tillerson denied that oil, gas and coal receive tax subsidies, responding, "I'm not aware of anything the fossil fuel industry gets that I would characterize as a subsidy. It's simply the application of the tax code broadly — tax code that broadly applies to all industry. ... So I'm not sure what subsidies we're speaking of."

Fossil fuels have enjoyed a continuing infusion of special tax subsidies for over 100 years. 

Oil, gas and coal industries *do* receive many subsidies that are shared with other industries. They include provisions under Sections 167 and 168, for accelerated depreciation, and Section 199, the domestic production deduction. They share the benefit of tax-exempt bonds for certain public energy-related projects under Section 103, and for certain private energy-related projects under Sections 141 and 142 with renewable energy developments. Several tax credits are shared with other groups in the energy sector, such as the Energy Research Credit under Section 41, and the Gasification Credit, under Section 48B, which provides a benefit to qualified projects to convert coal, petroleum residue, biomass, or other materials into a synthetic gas.

Fossil fuel companies also enjoy a special exemption from the corporate tax. While, generally, publicly traded entities are subject to the corporate tax, section 7704(c) and Section 851 permit fossil fuel investors to enjoy pass-through taxation, avoiding the corporate “double tax.” Public trading makes the investments highly liquid and minimizes information and transaction costs. The structures are permanent and lend significant legislative certainty to investors about the tax benefits they are to receive. The fact that this special subsidy is also enjoyed by those with timber interests and the financial services industry does not make it any less a subsidy.

Others sometimes suggest that deferring or delaying the payment of tax does not provide a benefit. For example, a contributor to Forbes, Tim Worstall, recently argued that deferring or delaying paying taxes is not really a subsidy. Most businesses understand the time value of money and use it to their advantage. In the simplest terms, if I pay taxes today, those are funds gone from my pocket and I cannot spend them on anything else. On the other hand, if I can defer paying a sum for five or ten years, I can invest the sum, enjoy gains from compound interest (or better yet capital gains), and still pay the tax at a later date. Delaying and deferring can result in substantial tax savings. Plus, firms that use loans finance their investments gain an even higher return and pay even lower taxes, since they enjoy the tax benefits today, but delay any actual outlays of cash to make these investments until they repay their loans. By using debt financing to purchase equipment that is subject to accelerated depreciation or expensing, a firm can enjoy a negative tax rate.

There are also many tax subsidies that are exclusive to fossil fuels. Oil, gas and coal may claim deductions in excess of their investment through percentage depletion under Sections 611-613A and 291. They may deduct certain expenses immediately when they would otherwise be required to capitalize and recover their investments over time. These include a deduction for tertiary injectants (fracking fluids) under Section 193, and an election to expense intangible drilling costs (under Sections 263(c) and 291). Certain coal royalties enjoy reduced tax rates under Section 631(c). The fossil fuel industry is allowed to treat royalty payments as foreign taxes paid, applying the foreign tax credit to offset U.S. income taxes. They also benefit from special credits, such as the advanced coal project credit (Section 48A), the Indian coal credit (Section 45), the enhanced oil recovery (EOR) credit (Section 43), the marginal wells credit (Section 45I), and the carbon dioxide sequestration credit (Section 45Q)  Fossil fuels enjoy exemptions from the application of certain rules. Working interests in oil and gas property enjoy an exception to the passive activity loss rules under Section 469. There is a safe harbor from arbitrage rules for prepaid natural gas contacts under Section 148. Finally, they receive subsidies to support environmental compliance. There is a safe harbor from arbitrage rules for prepaid natural gas contacts under Sec. 148. Finally, they receive subsidies to support environmental compliance. All of these subsidies are explained in more detail in my 2016 article "Picking Winners and Losers: A Structural Examination of Tax Subsidies to the Energy Industry."

While occasionally people will suggest that tax benefits are not really subsidies, this notion has been long discredited. As Dan Shaviro is fond of saying, Congress can give a grant of $2 million to the aerospace industry to design a fighter jet or it can grant a $2 million tax credit for that fighter jet. The benefit to the industry is the same. Congress appears to prefer tax subsidies to direct spending because people succumb to the "tax benefit is not a subsidy" fallacy, because the subsidies are less visible and because they are not scrutinized and fought over each year the way the federal budget is.


Eliminating the tax subsidies to fossil fuels would save approximately $26 billion in tax revenues over five years. This sum may seem rather modest in the context of budgetary spending. However, when we take into account all of the extensive health and other social and environmental impacts, giving subsidies to fossil fuels is not only wasteful, but ludicrous.