Tax Expenditures on Big Oil

In a sane world, we wouldn’t allow the substantial negative externalities associated with burning fossil fuels go unpriced. If you owned a vehicle that you really enjoyed, but could only be operated by showing up at my house once a year and smashing three of my dinner plates it wouldn’t be the “free market” position to say that you should be allowed to do this unabated. Simply banning the use of useful-but-destructive energy sources would deprive of us their usefulness, but failing to charge any price for the destructiveness leads to overconsumption and bad outcomes. And when it comes to oil, the situation is even worse than allowing the externalities to go unpriced — oil companies get giant subsidies through the tax code.

Sima Gandhi explains:

But what’s more interesting about this story is Exxon’s effective income tax rate. Exxon has over the past couple years paid a U.S. federal income tax that is about 10 percent lower than its non-U.S. effective tax rate. Other oil companies also pay less, and in some years this difference has approached 50 percentage points.

Oil companies pay less in U.S. taxes in part because they receive generous tax subsidies. These subsidies will cost the U.S. government about $3 billion next year in lost revenue and nearly $20 billion over the next five years.

Tax expenditures are government spending through the tax code. They are distributed through deductions, exclusions, credits, exemptions, preferential tax rates, and deferrals. What makes them look different from grants or checks is that they are delivered through the tax code as part of tax expenditure spending programs.

CAP is starting up a bunch of work on the general subject of tax expenditures that’s worth looking at.