Natural Resources Program

Written Comments by Aileen Roder, Program Director, Taxpayers for Common Sense

I. History of Subsidies

Between 1948 and 1998, the Department of Energy spent $111.5 billion on energy research and development. Of this amount, $26 billion went towards fossil fuel R&D. Unfortunately, these hefty taxpayers giveaways to the mature fossil fuel industry continue today with tax breaks, royalty exemptions, and direct subsidies.

Subsidies for oil and natural gas began in 1916 with the federal government creating its first tax breaks for oil and gas production. After 90 years of taxpayer-funded subsidies, the oil and gas industries are flourishing. Yet, taxpayers continue to contribute between $4 billion and $30 billion annually to the energy sector.

In 1932, the federal government started subsidizing the coal industry by permitting companies to take the percentage depletion allowance for coal mining. As a result, coal mining companies could deduct the value of coal removed from a mine from their income. Over the last 70 years, federal funding for coal research and development has provided billions to the coal industry. Yet, these large coal subsidies continue today.

America is now facing its largest budget deficit in history. Our $5.6 trillion budget surpluses have vanished and we are left with the specter of a $2.2 trillion deficit over the next ten years. Common sense would dictate that we engage in budgetary belt-tightening, instead of continuing to splurge on large, unnecessary taxpayer giveaways. Instead, the House and Senate proposed energy bills are planning to give coal, oil, and natural gas companies billions upon billions of taxpayer dollars in the next 10 years to subsidize their cost of doing business.

Instead of requiring energy companies to stand on their own feet, the government has set up a perpetual subsidy system. The lesson we have failed to learn time and again is that once these subsidies have been provided either through direct authorizations or tax breaks, it is almost impossible to stop them or remove them from the tax code. Large energy companies act as if they cannot survive without taxpayer handouts, perpetuating an endless cycle of subsidies. Meanwhile, special interest lobbyists come to Washington asking for new tax breaks for fossil fuels.

Rather than analyze the destructive impacts of continued federal subsidies, the current House and Senate energy bills are rehashing the same old energy policy of throwing big money at incredibly profitable energy companies at the expense of taxpayers. Many of the most egregious energy bill sections have been pushed over and over by industry in an attempt to attach lucrative special interest provisions to legislation that Congress must pass.

Industry recovered without billions of dollars of proposed tax breaks in the 1990's when oil was at record low prices; it is unclear why industry suddenly needs these tax breaks now that oil and gas prices are extremely high.

Energy bill proponents are again arguing that the financial breaks to the fossil fuel industry will lift domestic production. Since record low prices in the nineties, domestic production has increased as prices have risen. It is hard to see how the energy-bill subsidies to this industry that were unneeded when prices were low are needed now.

Large oil and gas companies are already conducting research and development into new sources. It is a cost of doing business, so why does the American taxpayer have to step in and pick up the tab for these costs? Even without the energy bill, these companies will continue to explore.

II. Current Legislative Proposals

House Energy Bill H.R. 6

Fig. 1

Oil and Gas Subsidies (Fiscal Year 03-13)

Overall $11.3 billion in subsidies $8.6 billion in tax breaks $2.7 billion in direct subsidies

Senate Energy Bills S. 597 and S. 14:

Fig. 3

Coal Subsidies (Fiscal Year 03-13)

Overall $4.8 billion in subsidies $2.2 billion for tax breaks $2.6 billion for direct subsidies

III. Highlighting Provisions

A. Coal Subsidies

2. Senate Energy Bill Proposed Subsidies (S. 597)

• Title II, Subtitle A: authorizes $1.8 billion for the "Clean Coal Power Initiative"
  
  
• Title IX: Gives $87 million for the Secretary of Energy to carry out an R&D on coal mining technologies.
  
  
• Title IX: $630.5 million is authorized for coal and power systems application.

Since 1984, Congress has allocated nearly $1.8 billion in federal subsidies to the coal industry through the oxymoronic "Clean Coal" Technology Program. Both the Clean Coal Power Initiative and the Clean Coal Technology Program providing matching federal funds of up to 50% for private industry in its efforts to develop cleaner burning coal technologies. After taxpayers have spent billions on the wasteful and mismanaged Clean Coal programs, proposals in the Senate bill would have the federal government throw billions more into similar programs. The federal government should not put anymore money into a program that has already proven ineffective.

B. Royalty in Kind Provisions

Section 103 of S. 14 permits the Secretary of Interior to take royalty in kind when in best interest of the government and it when it will not result in revenue losses. The few instances in which the Department has implemented a royalty in kind program have been fraught with difficulties.

Minerals Management Service (MMS) has taken royalty in kind:

• in working with the Small Refiners Association;
• to fill the Strategic Petroleum Reserve;
• Starting in 1995, MMS studied the royalty in kind program through several pilot programs (i.e. the Wyoming Royalty in Kind Pilot which began in 1998).

Both the House and Senate energy bills look to open up the royalty in kind process not just to pilot projects or isolated instances, but system wide. In a January 2003 report, the GAO found that under royalty in kind pilot programs, the U.S. was collecting less than when royalties are collected in cash. The GAO also found that there were problems monitoring and evaluating its royalty in kind Program, determining the program's overall cost and effectiveness, and determining whether a royalty in kind program generates at least as much revenue as traditional cash royalty payments as required by law.

The royalty in kind program leaves a lot of unanswered questions. Something is wrong when we have a GAO study documenting huge problems with the programs, yet Congress is rushing to expand this program throughout the system. This is a huge gamble with taxpayer dollars.

C. Oil and Gas Research and Development Funding

• The 10-year cost of current Petroleum Research and Development is $560 million.
• S. 14 Title IX authorizes an appropriation of $2.91 billion for fossil fuel R&D.
• S. 14 Title IX specifically authorizes over $2 billion for oil and gas research and development.

The multi-billion dollar industries of oil and natural gas production can afford to fund their own R&D. They do not need additional taxpayer handouts.

IV. Conclusion

It is outrageous that profitable energy companies are gunning for taxpayer dollars at a time when we have a rapidly growing budget deficit. The White House is projecting a 2003 budget deficit of more than $300 billion - now is not the time to give billions more to energy companies to pad their profit margins.

It is a time for fiscal discipline. The fuel gauge for the federal treasury is on empty and we simply cannot afford these massive giveaways to big energy. Current proposals are misguided and only prolong outdated policies of the past. By keeping the energy industry on the federal dole, and forcing the government to pick winners and losers in the marketplace, taxpayers lose.