Absurd Spin from OMB on Energy Tax Breaks

In what some Democratic members of Congress are calling a first step towards a larger change in energy policy, the House of Representatives on Thursday passed the Creating Long-Term Energy Alternatives for the Nation (CLEAN) Act (H.R. 6). The basic idea of the bill is to take certain tax breaks away from oil and gas companies (who have been enjoying record profits and thus seem to make poor candidates for tax subsidies) and reallocate that money to the development of alternative fuels. In a fit of brazen hypocrisy, the President's Office of Management and Budget declared that this bill embodied a "tax and spend philosophy" since it was reallocating the money to encourage energy independence.

The problem with this statement is that the federal government already is "spending" billions on oil and gas companies right now in the form of these tax loopholes. Foregoing billions in revenue in order to give tax breaks to Big Oil is the same thing as spending billions in order to help Big Oil, from a budgetary perspective, so the government already has a "tax and spend" approach to energy.

In the OMB's view, however, the billions showered on oil and gas companies by Bush and the Republican Congress in the tax provisions of the Energy Policy Act of 2005 (at the expense of American taxpayers who don't own stock in energy companies) did not count as "spending" that would eventually be paid for by higher "taxes" on everyone else. But, the OMB believes that moving these billions away from the immensely profitable oil and gas companies and towards eco-friendly fuels that might make us less dependent on foreign oil -- that's a tax hike coupled with new government spending. Other provisions correcting mistakes in lease contracts which allowed profitable royalty-free drilling on public lands (that means land owned by all of us) and using the revenues for alternative fuels -- those provision apparently embody big government run amok, in the OMB's view.

To understand just how ludicrous the OMB's statement is, a little background helps. The legislation only repeals two of the tax subsidies directed at oil and gas companies that CTJ has criticized. One is the domestic manufacturing tax deduction, which is available for oil and gas companies only because a provision of the 2004 tax cut bill redefined manufactured goods to include oil and gas. The other is the five-year amortization of geological and geophysical expenditures (the faster write-off of the cost of exploring for oil and gas, in other words), which would be changed to a seven year amortization. (Even the White House opposes this tax break but nonetheless signed into law the 2005 energy bill that included it). Other provisions would fix administrative snafus that have allowed companies drilling on public lands to avoid paying royalties. Around $14 billion in savings would be reallocated towards a new Strategic Energy Efficiency and Renewables Reserve, which would promote energy efficiency and fund research on alternative fuels.

Now, it's certainly debatable whether or not Congress should be conducting energy policy (or health policy or housing policy or countless other policies) through the tax code as it currently does. Citizens for Tax Justice has long argued that when Congress feels it won't get away with enacting an initiative as a normal spending program, it basically enacts the same initiative as a tax policy at the same cost. (Foregoing $200 billion in taxes because of deductions for health care is the same as spending $200 directly on health care.) The downside to Congress's tax expenditures, as they are known by tax analysts, is that the costs are often ignored and sometimes they are structured in a way that is regressive (as deductions that offer a larger benefit to people in higher income tax brackets, for example).

In this case, it's not really clear why spending $14 billion on alternative energy is any different, in budgetary terms, than offering $14 billion in tax breaks for oil and gas companies. The only difference is that the $14 billion spent on alternative energy has a policy rationale that most people agree with.

Perhaps this type of argument should be something we're used to in American politics. But what's alarming is that the stakes in this situation are relatively low. One can only imagine how absurd the public discourse might be when the debate turns to tax breaks the conservative establishment really cares about, like the bulk of the income tax breaks that expire in 2010 and that essentially benefit the wealthy.