For the purposes of this database, we defined federal energy subsidies as disbursements by the federal government in the form of (1) grants, (2) loans or loan guarantees, or (3) direct reduction in tax liabilities that have an identifiable federal budget impact and are specifically targeted at energy production.
Sources and Definitions
As defined on USASpending.gov, grants are funds awarded to a non-federal entity for a defined public or private purpose in which services are not rendered to the federal government. Our sources for grant spending were USASpending.gov and the Department of the Treasury’s list of recipients of funds under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009. The Section 1603 grants were compiled using data provided as of February 14, 2013. See Website, U.S. Department of the Treasury, Recovery Act, 1603 Program: Payments for Specified Energy Property in Lieu of Tax Credits, http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx.
For a full list of grant programs included in the database, click here.
Loans and Loan Guarantees
The federal government provides financial assistance in this category in the form of either direct loans or guaranteed and insured loans.
Direct loans are those in which an entity (individuals, companies, state and local governments, etc.) borrows an amount directly from the federal government and agrees to repay it according to the terms set by the agency providing the loan.
Guaranteed loans and insured loans are an agreement made by the federal government to repay any outstanding debt incurred by a borrower in the case of default to the lender that is owed repayment. This includes both principal and interest owed. The federal government may guarantee either a portion or the total face value of a loan. In many cases after a borrower receives a loan guarantee from the federal government, the federal government then loans the borrower the money through the Federal Financing Bank, as was the case with Solyndra.
It is important to note that, to the extent that loans and loan guarantees provide greater financial assistance or more favorable loan terms than would otherwise be obtained through the private lending market, they are a subsidy. However, loans and loan guarantees should not be considered the same type of financial assistance as grants and tax subsidies, which are direct expenditures made by the U.S. Treasury. Loans and loan guarantees are intended to be paid back by the recipient, and so the full amount that is obligated for this type of assistance cannot be truly considered “spent.” It is only in the case of defaults that the U.S. Treasury may not recoup the full amount obligated for the loan guarantee.
As such, IER has not included loan and loan guarantees in its analysis of cumulative money spent on energy subsidies, but information on loans and loan guarantees has been made accessible to the public through our database.
For a full list of loan and loan guarantee programs included in the database, click here.
Energy-Specific Tax Subsidies
We obtained our data from the Office of Management and Budget’s Analytical Perspectives volumes, U.S. Government Budget, Fiscal Years 2011-2013. Those volumes are available at http://www.whitehouse.gov/omb/budget. Information not available in the Analytical Perspectives volumes, such as the revenue losses associated with the special tax rate for nuclear decommissioning and the exception for publicly traded partnerships with income derived from energy-related activities, was obtained from the Joint Committee on Taxation’s Estimates Of Federal Tax Expenditures For Fiscal Years 2011-2015, found at https://www.jct.gov/publications.html?func=startdown&id=4385.
Energy tax subsidies are defined for the purposes of this website as those that provide a direct reduction in tax liability, and are specifically targeted at energy production. For a full list of energy-specific tax subsidy programs included in the database, please see the tax subsidies section of this website.
Broad-based tax incentives available to, but not specifically directed at the energy industry were not included in the analysis of federal subsidies. This practice largely mirrors that of the Energy Information Administration (EIA), with some methodological differences.
The broad-based tax incentives not included in the database are:
– The Domestic Manufacturing Tax Credit (Section 199) provides reductions in taxable income for American manufacturers, including domestic energy companies. This deduction was created in the American Jobs Creation Act of 2004 and is also available to traditional manufacturing sectors and other activities like engineering, architectural services, and qualified film production. EIA also categorized this as a broad-based tax incentive in their 2011 analysis of energy subsidies.
– Dual capacity taxpayer status allows multinational corporations to claim a foreign tax credit for income taxes paid in other countries. This tax provision is available to both energy and non-energy industries, and EIA also categorized this as a broad-based tax incentive in their 2011 analysis of energy subsidies.
– Cost recovery and depreciation allowances allow a taxpayer to recover capital investment expenses over time. Expensing and accelerated depreciation schedules arise from many provisions of the tax code and are widely available to energy and non-energy industries. Examples include (1) the Modified Accelerated Cost Recovery Schedules for renewable properties, smart electric distribution property, and natural gas distribution lines, (2) depletion allowances for oil and gas producers and royalty owners, (3) the temporary 50 percent expensing of equipment used in the refining of liquid fuels, (4) the Amortization of Pollution Control Equipment, and (5) the Amortization of Geological and Geophysical Expenditures over two years for independent producers.
– Research and development (R&D) deductions and tax credits are provided to a company to incentivize risk-taking and product innovation and are available to every type of industry.
The principal R&D provisions in the U.S. tax code are:
1) The Research & Experimentation (R&E) Tax Credit, which specifies that a qualified research activity must: (1) create or improve functionality, performance, reliability, or quality of a business component, (2) discover information that reduces uncertainty about the development or improvement of the business component, (3) undergo a systematic trial and error process, and (4) rely on employment of new or existing principles in the physical, biological, engineering, or computer sciences; and
2) The deduction for Research & Experimental (R&E) Expenditures
All taxpayers, including energy companies, which conduct qualifying R&E activities may take both the credit and the deduction. However, for the oil and natural gas industries, research and development of new oil and gas reserves—although essentially the same type of expenditure—is specifically excluded from the deduction for R&E, and is provided for by an analogous provision allowing deductions for Intangible Drilling Costs. Since the requirements for the R&E credit are more narrowly-defined than those for the R&E deduction, oil and gas drilling operations do not generally qualify for the R&E credit.
The Institute for Energy Research recognizes the superior ability of free markets, not government, to allocate resources in the energy sector. Generally speaking, any reduction in federal taxation tends to lower consumer prices and give more options to the private sector. However, not all “tax cuts” are equal, in terms of their economic efficiency or promotion of innovation.
Rather than giving a targeted tax reduction or “subsidy” to a specific technology, it is more effective to reduce the marginal tax rate across all energy sources. A simple tax code with a low marginal rate promotes economic growth, but it also prevents government officials from effectively picking winners or losers with a system of punitive rates coupled with exemptions for favored groups.
Types of Subsidies Not Included
Four broad categories of activities that we have not included in this database are:
- Regulatory subsidies
- Tariffs/excise taxes
- Contracts for goods/services above fair market value
- Certain indemnification laws/risk transfers
We are considering adding regulatory subsidies at a later date. Regulatory subsidies, while real, are exceedingly difficult to quantify in a consistent manner. For example, while a regulation like the Mercury and Air Toxics rule on coal-fired power plants will have very significant costs to one industry in particular—and conversely, benefits for other substitute sources of electricity that will profit from the void left by retired coal plants—analyzing the full economic losses and gains across the economy requires that multiple variables be accounted for.
Tariffs and excise taxes present a similar dilemma because the subsidy consequences of tariffs are also hard to reduce to an economically accurate figure. These and other issues led us to leave out those forms of subsidy out of the database until a later date.
While contracts data is available through USASpending.gov, the provision of services to the government does not provide as clear an example of outright subsidy where the government paid over fair market value for a product. The provision of, say, nuclear power services to the Navy does subsidize the nuclear industry, but that type of expenditure is not necessarily targeted in the sense of conferring a specific and special benefit, nor would it be easy to ascertain if the government was overpaying for said service.
In addition, contracts may be offered in a competed, open-bidding process in which the field is open to any eligible candidate, in which case the contract is much less likely to confer a subsidy than a non-competed contract. Due to these complexities, we have not included contracts at this time, though we are planning to add them at a later date as well.
Lastly, there are several federal indemnification/risk transfer laws that arguably do have an impact on energy industries, but the impact of these laws is difficult to quantify. They include the Price Anderson Act for nuclear power facilities and the Oil Spill Liability Trust Fund.
How Often Will the Information Be Updated?
The information contained in the grants database and loan and loan guarantee database will be updated semi-annually each June and December. The data on tax expenditures will be updated with the release of each new White House budget, which typically occurs in the first quarter of the year.
A Note on Data Reliability
All of the data used here comes from the federal government. It is unlikely to be wholly accurate. To underscore this point, the Sunlight Foundation’s investigation of government data provided through USASpending.gov for Fiscal Year 2011 found more than $1.55 trillion in misreported grants data for that year alone. The Foundation’s analysis evaluated grants data on the basis of completeness, consistency, and timeliness of reporting.
Bearing this in mind, the data available through USASpending.gov and our other sources of information like the Office of Management and Budget is the best data available to independent outside investigation. We can assure consistent adherence to the federal government’s published data, without guaranteeing the underlying accuracy of the federal government’s data.