Tax reform and the energy sector: looking for winners and losers
The optimal position for your industry in any tax reform is to see general tax rates drop while also keeping all of your old subsidies. The political lobbying on these bills is enormous, and given the scale of the energy sector in the US economy, and the need to transition towards lower carbon fuel sources, it seemed important to look at the tax reform proposals through the lens of energy.
When the Joint Committee on Taxation assesses the cost to Treasury from the proposal, they are focused on the new rules or repealed line items a particular bill may put forward. But the economic impacts of a new tax regime is affected by three major threads: whether general changes in tax rules disproportionately affect some energy resources relative to others; energy-specific line items being repealed, changed, or added; and whether political power among particular industry-subsectors has enabled them to have their cake and eat it too by keeping their old subsidies while also getting lower top tax rates.
This working paper is a first cut at doing this. I've no illusions I've captured everything, or mapped out all of the interactions. But even the first order effort to combine these three main threads is important in gauging winners and losers under the proposals. This is a discussion draft, so email your comments, concerns or corrections if you've got them.
To better see patterns, the tax line items have been grouped into three general energy categories: conventional energy (mainly fossil); emerging resources; and mixed (which includes the grid and transport policy). Both new and (apparently) surviving tax expenditures are included.
There's a great deal of detail in the full summary, but my key takeaways are below:
- Largest subsidies to fossil fuels are not touched by tax reform proposals, and post-reform subsidies to fossil will remain very large. Although a handful of tax subsidies to oil and gas are eliminated in tax reform, the largest ones remain untouched by either proposal and exceed the reductions by a large margin. As shown in Table 4, net subsidies to conventional energy after tax reform are still at a staggering $52 to $67 billion dollars over the 2018-27 time period. Fossil fuels comprise more than 80% of the total, with nuclear the remainder.
- Effective tax rates on fossil energy are likely to remain well below those on competing resources as a result. The residual tax subsidies, in combination with a lower top corporate rate, and lower top rates on income flowing from pass-throughs, will bring down the effective tax rate on key fossil fuel sectors even further.
- Tax subsidies to nuclear are increased or untouched via tax reform. Further, the large subsidies flowing to nuclear via other transfer mechanisms in credit, insurance, and government ownership of fuel cycle functions, will also remain in place.
- In contrast, significant reductions in subsidies to renewable energy are being implemented, particularly under the House proposal. Although the eligibility period for a handful of these subsidies is being extended, changes to the production tax credit for wind are estimated to be much larger, more than offsetting the gains to other renewable resources. Net subsidies to emerging energy resources will drop significantly under the reform plans. There will be some gains through reduced corporate rates and pass-throughs, though renewables are not likely to benefit to the same degree as fossil energy will due to differences in industry scale and the use of large partnerships.
- In the “mixed” category, the largest changes are in the area of transportation and parking. Commuting via bicycle or mass transit will no longer be subsidized, though the largest shift is likely the elimination of employer-subsidized parking – which could shift ridership to less carbon-intensive modes.