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House Democrats’ Tax Plan Fails to Eliminate Domestic Fossil Fuel Subsidies

Environmentalists say we must stop tolerating handouts for the fossil fuel industry.

The sun sets over an oil refinery in the southern Iraqi town of Nasiriyah on March 8, 2021.

Environmentalists found a glaring omission when they reviewed the latest plan from House Democrats for raising taxes on the wealthy and corporations to fund the $3.5 trillion budget reconciliation package: There’s no repeal of domestic tax breaks and other subsidies for the fossil fuel industry. Climate activists say such a repeal is crucial for keeping coal, oil and gas in the ground.

The latest revenue blueprint released by the House Ways and Means Committee on Monday would partially reverse some of the tax cuts approved by Republicans and President Trump in 2017 and close a corporate tax loophole enjoyed by U.S. fossil fuel firms extracting and profiting abroad. The plan also includes a range of subsidies and tax credits for clean tech and renewable energy, as well as for nuclear power plants and controversial carbon capture technologies that have yet to be proven feasible on a mass scale.

However, domestic subsidies for fossil fuels remain untouched. Those subsidies include a controversial tax break that allows oil and gas companies to write off many costs of drilling new wells, according to Lukas Ross, a program manager at Friends of the Earth, a nongovernmental environmental organization. The tax breaks and subsidies allow the costs of expanding fossil fuel production to be quickly deducted and, in some cases, have been around for more than a century, thanks to a powerful extraction lobby.

Markup on the bill continues this week, and Ross called on Ways and Means Committee Chairman Richard Neal (D-Massachusetts) and other leading Democrats to heed President Biden’s call for lawmakers to end domestic subsidies for the fossil fuel industry. Earlier this year, Biden ordered federal agencies to eliminate subsidies where possible and pause oil and gas leasing offshore and on public lands, but subsequent court rulings have determined that there is only so much the administration can do unless Congress acts. Unless the tax bill is improved, advocates say Congress is falling short.

“Climate justice is tax justice, and tax justice is climate justice,” Ross said in an interview on Monday. “This bill is a monumental failure of climate leadership, and we are calling on Chairman Neal and Nancy Pelosi to rise to the challenge of improving it before it reaches that Senate floor.”

Estimates vary by source, with some environmental groups claiming that the United States government gives away at least $20 billion in handouts to fossil fuel firms each year — money they argue should be used to fund renewable energy. A recent analysis by environmental and watchdog groups found that coal, oil and gas companies received between $10.4 billion and $15.2 billion in direct economic relief during the COVID pandemic thanks to efforts by the Trump administration to prop up the corporate economy.

A study released in July by the Stockholm Environment Institute found that two tax incentives alone increased the expected value for new oil and gas projects by over $20 billion during years when fuel prices were high, which helped finance the fracking boom that made the U.S. a world leader in fossil fuel production. One of the incentives is a deduction for the “intangible” costs of drilling new wells, such as labor, supplies, fuel and survey work; the other incentive can allow smaller drillers to claim a deduction greater than the value of a well itself in order to recoup costs and keep oil and gas flowing.

Repeals of these decades-old tax breaks and others have already been proposed in separate legislation introduced by Democrats in the Senate. If House Democrats fail to target these subsidies in their version of the reconciliation package, environmentalists hope progressives, such as Sen. Ron Wyden (D-Oregon) and Sen. Bernie Sanders (I-Vermont) will take up the torch.

Ross pointed to the Biden administration’s latest budget proposal, which identifies roughly $121 billion in potential revenue over the next decade from eliminating subsidies for fossil fuels. About $84.7 billion comes from closing an international “loophole” put in place by the Trump tax cuts that Ross said exempts overseas extraction income from being taxed back home. The current Ways and Means Committee proposal would close the loophole but fails to eliminate domestic subsidies worth an additional $36.5 billion.

“Major domestic subsidies like the deduction for intangible drilling costs and the percentage depletion allowance can’t be ignored,” Ross said.

The House Democrats’ plan does include a raft of tax credits for renewable energy, including an expanded credit for solar energy in low-income communities, as well as credits for emissions reductions and the construction of energy-efficient homes and commercial buildings. There are also proposed investments in a “Green Workforce” and a tax credit for consumers who purchase electric vehicles.

Still, as much of the country reels from climate-related disasters, environmentalists say lawmakers must transition away from fossil fuels as quickly as possible, and that means eliminating subsidies that keep the industry profitable. Mitch Jones, policy director of the environmental group Food & Water Watch, said climate activists are making clear to Congress and the Biden administration that “no handouts for fossil fuels can be allowed.”

“We must be halting new oil and gas drilling and fracking, not encouraging decades more of it,” Jones said in a statement on Monday.

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