In order to pay for its proposed $50 billion infrastructure investment, the Obama administration wants to cut some of the subsidies that the federal government gives to oil and gas companies. One subsidy in particular, the Section 199 manufacturing credit, would be denied to the oil and gas sector. Today, on CNBC, Rep. Paul Ryan (R-WI) derided cutting these subsidies as “ridiculous economics,” and claimed that such a step would inevitably increase energy prices:
We’re going to single out one sector of our economy, a very important sector of our economy, and say higher tax rates if you produce in the U.S. than any other sector in the economy. This is just ridiculous economics, redistribution, but more importantly, it’s just punitive. It’s punitive and it’s political and it’s not going to help our economy.
I would submit that the only thing “ridiculous” about this situation is that the federal government gives tax subsidies to one of the most mature, profitable industries in the country. Many oil companies have little to no federal corporate income tax liability, yet they still receive taxpayer handouts, something that a supposed free market devotee like Ryan should be staunchly against.
These taxpayer giveaways are particularly egregious when it comes to the Section 199 credit which is meant for “companies that produce goods or software or undertake construction projects in the U.S.” The goal of the credit is to protect manufacturing jobs in an era where cheap labor overseas is proving irresistible to many companies, not to subsidize dirty energy. Denying just this one credit to oil and gas companies can save $13.2 billion over ten years.
Ryan’s claim that removing the subsidies will drive up energy prices is also quite dubious. According to Citizens for Tax Justice, “there is no evidence that the additional profits [from tax credits] lead the companies to explore for more oil so that they can increase the supply.” In fact, the Office of Economic Policy at the Department of Treasury has found that removing subsidies for the oil industry would affect domestic production by less than one-half of one percent.
The CNBC segment was based on a new study by economist Joseph Mason, which purported to show that cutting the subsidies would lead to a slew of job losses, as he assumes domestic production would fall drastically. The study was funded by the American Energy Alliance, whose research arm, the Institute for Energy Research, has received money from ExxonMobil and the Claude R. Lambe Charitable Foundation, which was founded by Charles Koch of the oil and gas giant Koch industries.