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What is a subsidy anyhow?


The following ran in the March 18, 2012, edition of the Houston Chronicle. Economist Bernard Weinstein provided expertise for this story.

March 23, 2012

Subsidies, tax preferences, deductions, incentives and loopholes. Unfortunately, these terms are used interchangeably by politicians and the media and, for the most part, imply there is something unseemly about the tax code. In fact, the 13,000-page Internal Revenue Code, in addition to being a platform for raising federal revenues, is also an experiment in social engineering.

For example, home ownership is encouraged through the deductions for mortgage interest and local property tax payments. Personal saving is boosted through provisions that permit tax deferrals on current income that is deposited into IRAs and 401(k)s. And the tax code contains hundreds of provisions to induce businesses to undertake certain desirable activi- ties, such as search for energy resources.

President Barack Obama rails constantly about the need to remove the huge and unnecessary subsidies to the oil and gas industry. But the industry doesn't actually receive "subsidies." What it does receive is access to the same "deductions" that are available to most other manufacturing and mining industries. Simply put, deductions from gross revenue allow businesses to write off legitimate expenses incurred in the production of that revenue to ensure that taxes are levied on net income.

By contrast, a "subsidy" is a direct payment from the government, i.e. taxpayers, to a business entity to promote development of a new technology or product that is deemed desirable from a societal perspective. Currently, renewable energy sources such as wind and solar are being subsidized to the tune of $12.5 billion a year, presumably because of the perceived environmental benefits that attend these non-polluting technologies.

The argument for continuing these subsidies is that wind and solar are infant industries that have not yet achieved economies of scale. Unfortunately, that is never likely to happen because renewables - with the exception of hydropower - are unable to achieve the scalability and energy density of generating plants fueled by coal, natural gas or nuclear.

In contrast to renewables, the oil and gas industry receives about $2.8 billion in tax preferences. Not only do these incentives pale by comparison to the subsidies for wind and solar, especially when compared on a Btu-equivalent basis, but the economy gets a lot more bang for the buck. The year 2011 was the third consecutive year of higher domestic oil production, while natural gas output reached an all-time high. Over the past five years, about 158,000 new jobs have been created in the oil and gas industry while employment growth associated with renewables has been minuscule. Indeed, with the recent failures of Solyndra, Beacon Power and other renewable energy companies, industry-wide employment has probably declined.

Despite more than a decade of huge direct taxpayer support, renewables still can't meet the market test and, therefore, their subsidies should be reduced or eliminated.

If policymakers are genuinely concerned with cutting greenhouse gas emissions while enhancing America's energy security, a better allocation of federal largess would be to target subsidies, preferences, incentives or whatever we choose to call them at natural gas and nuclear. These clean-burning fuels can heat our homes, power our vehicles and generate electricity for America's households and industries a lot more cheaply and reliably than renewables.

Weinstein is associate director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business, in Dallas.