Democrats being Democrats on oil subsidies issue

Jerry Taylor and Peter Van Doren of the Cato Institute provide what is the best take on the Democratic action to over 10 years cut $14 billion in subsidies headed for the petroleum industry. Their contention is, we free market advocates really have little to get excited about on one hand, but on the other hand, yup, the cuts are just more of Democrats being Democrats.

There is no identifiable market failure that might cause private actors to significantly under-invest in domestic oil production. In practice, however, the Democrats are simply transferring subsidies from one energy sector to another with no net reduction of taxpayer funds going to corporate in-boxes.

Taylor and Doren argue that the argument that the more you subsidize oil production the more you get isn’t very strong. There is just not enough unexploited oil in the United States to greatly affect world crude oil prices. They do the math and come to the conclusion that that eliminating or cutting back on federal subsidies to the oil and gas business is a fine idea. But that's not exactly what the Democrats have in mind.

The most significant part of the bill — from both a budget and political standpoint — is the call for about 40 companies producing oil and gas from the Gulf of Mexico to voluntarily pay a "conservation resource fee" to the federal Treasury. Back in 1998 and 1999, those companies signed leases to drill in certain federally-owned deepwater reserves without any requirement that royalties be paid. If the oil companies in question don't voluntarily agree to pay the proposed "conservation resource fee," the bill would prohibit them from getting leases to drill on federal land in the future. The Congressional Budget Office (CBO) estimates that almost a third of the bill's savings - $4.35 billion over ten years — would come from those fee payments alone. A similar tightening of the royalty payment rules from other federal lands will bring in an additional $210 million over ten years.

In principle, there's nothing wrong with renegotiating leases. Contracts, after all, are renegotiated in private markets all the time. If Party A refuses to renegotiate with Party B, there is no reason why Party B must commit to doing future business with Party A. If the taxpayer is being unfairly taken advantage of, there's nothing wrong a call for renegotiation.

One might argue, however, that the economy would be ill-served by imposing ever-steeper royalties (taxes) on oil and gas extraction from federal lands, particularly when Exxon Mobil, for example already pays more taxes to government at all levels than they do profits to private stockholders.

The suspicion that the Democrats are primarily interested in taking even more money out of the oil companies' hide and not with any existential concern for tax justice is reinforced by a provision of the bill that would impose a similar "conservation of resources fee" on all non-producing oil and gas leases in the Gulf of Mexico as well. This is a naked tax hike of $1.75 billion over a ten-year period unadulterated by any cover story about equity or tax fairness.

Taylor and Doren conclude:

Surprisingly enough, the Democrats' oil-subsidy search-and-destroy operation is far less brutal than advertised. An ambitious and intellectually rigorous bill would have also targeted the accelerated depletion allowance provided to small oil producers (about another $7.6 billion over ten years), preferential expensing for equipment used to refine liquid fuels ($830 million over five years), accelerated depreciation for natural-gas distribution pipelines ($560 million over five years), accelerated depreciation for expenditures on dry holes (with unclear budgetary implications), and the exemption from passive loss limitation for owners of working interests in oil and gas properties ($200 million over five years).

(Note: Accelerated depletion allowance provided to small oil producers is a pet bill of Sen. Ted Kennedy, whose family trust, held in an offshore bank, just happens to include stock in an oil company that qualifies for the allowance.)

The Democrats' somewhat dodgy anti-subsidy crusade, however, collapses into ashes with the proposed "Strategic Energy Efficiency and Renewables Reserve" tacked on to the bill. In short, all fiscal gains to the Treasury associated with the above will be handed back out again to corporations like GE, British Petroleum, and you-name-the-industrial-conglomerate engaged in energy efficiency and renewable energy businesses. But the same arguments against handouts to "Big Oil" can be as easily marshaled against handouts to Big or Little Fill-In-the-Blank. And with energy prices this high, there are ample incentives for investors to spend money on oil and gas production, renewable energy, energy conservation, or other energy exotica.

After all the math is done – here’s the money quote:

The Republican abandonment of economic principle and subsequent love affair with K Street lobbyists gave the Democrats a wonderful opportunity to launch a politically winning total war on corporate welfare. Pity that they don't seem interested in taking advantage of it.

In oither words, it's same-old, same-old: corporate welfare isn't necessarily bad; it's only bad when your pet corporations aren't getting the welfare.