Fossilized Finances: State and Federal Oil and Gas Subsidies in the Permian Basin

The Permian is by far the largest oil producing basin in the United States and the second largest for natural gas. Firms in the region have been highly profitable, yet have continued to benefit from a wide array of government subsidies. Some of the subsidies have been in place for decades, though new ones continue to be introduced as well. All of the subsidies work against the need to decarbonize our economy and erode the competitive positioning of lower-carbon substitutes.

Cover of 2023 Texas tax exemptions report

Last October, I wrote about the way that arcane statutory language on what tax breaks needed to be reported in Texas resulted in the largest tax subsidy to oil and gas in the state not being reported at all. Specifically, if a particular tax does not comprise 5% or more of the state's revenues, exemptions from that tax don't need to show up in the biennial Tax Exemptions & Tax Incidence Report. This exemption applies even if the revenue loss from the provision to the state Treasury is tens or hundreds of millions of dollars per year.

Oil and gas are often co-produced at the same wells, and tax breaks to one are often applied to the other in a similar way. Most states report the joint revenue loss from the tax break flowing to both fuels. Many states also focus on the scale of the revenue loss rather than the scale of the tax base in deciding what must be reported in their tax expenditure budget. The magnitude screen seems a good one, since if a provision is costing taxpayers $50 or $100 million per year it is reasonable to assume that state taxpayers would want to know about it.

In Texas, however, the oil and gas rules are in separate sections of the statutes. As a result, the reporting threshold for the oil production tax and the natural gas production tax are calculated separately. The result in many years has been to hide the very substantial revenue losses resulting from the natural gas subsidy.  

The good news is that the latest version of the Tax Exemptions & Incident report, released in February 2023, does include high cost natural gas. Table 10 from that report is shown here. 

It is likely that this change in reporting was the result of surging natural gas prices during 2022 driving the associated production taxes to exceed the 5% reporting threshold, rather than a recognition that regardless of that threshold the provision was still causing large enough losses that transparency should be provided. Earth Track has requested clarification on this from the Comptroller's office. 

However, because eligibility for the high-cost natural gas is driven primarily by technical attributes of the wells and not on whether the field is actually profitable, we see surging revenue losses to the state at the same time profits to oil and gas reached their highest levels in years. This is a particularly poor incentive structure.

And the cost to Texas taxpayers has been huge. The provision was expected to reduce production taxes on natural gas by nearly $1.4 billion in 2023, and $6.3 billion between 2023 and 2028. This adds to the $11.6 billion in subsidies to these gas producers between 2009 and 2022.

It is time to end this subsidy; for specific recommendations, see my October post.

Natural gas fracking well in Louisiana

While subsidies to fossil fuels are thankfully getting increasing attention, even at the level of the G20 (see paragraphs 24-26 of the link), subsidies to a variety of environmentally harmful activities are pervasive at lower levels of government as well.  An Earth Track review of state-level subsidies to biofuels in the United States, for example, found roughly 200 state and local programs supporting ethanol and biodiesel.  These programs existed in nearly every state of the country.  The Database of State Incentives for Renewables and Efficiency (DSIRE), run by the North Carolina Solar Center at North Carolina State University, identifies over 2,000 programs supporting renewable energy and energy efficiency alone. 

More systematic assessments of sub-national subsidies, and how they affect natural resource use, are not very common.  A useful review of state-level energy tax subsidies was done by Joe Loper of the Alliance to Save Energy more than 15 years ago; I've not seen a more recent treatment of the topic in the US.  Evaluations of specific sectors in specific states are also infrequent, though less so.  A recent study done by Melissa Fry Conty and Jason Bailey at the Mountain Association for Community Economic Development, for example, does a good job examining coal subsidies in the US state of Kentucky.  The analysis is striking in two respects:  it illustrates how complex the state-level subsidies are; and it demonstrates that even after one credits the coal sector for direct revenues and those associated with jobs created indirectly from coal industry multipliers, the subsidies still exceed the revenues.  

The norm in resource subsidy assessments is to focus on national policy, dismissing the messy world of sub-national subsidies as de minimis.  DSIRE, for example, does not monitor subsidies to conventional fuels at all, though many US states also offer them.  In site operators do not attempt to quantify the subsidy cost of the programs they do track.  The data problem is compounded by the fact that many states do a poor job tracking subsidies themselves.  State-level reporting of tax expenditures, for example, is more the exception than the norm. 

The Conty and Bailey study of Kentucky coal subsidies is a useful reminder to resist this urge and instead to identify solutions that can improve transparency at multiple levels of government at once.  There are multiple reasons to do this. 

First, many state and local subsidies are not very effective.  They attempt to influence economic activity to migrate from one subidized geographic region to another, creating a "race-to-the-bottom" bidding war that may generate little net new economic activity; or only at great cost.  Good Jobs First, a Washington, DC-based organization has been tracking these economic bidding wars for nearly two decades, with many examples of their poor efficiency.  

Second, although state and local subsidies often are smaller than those on offer from the federal government, this doesn't mean they are actually small.  Consider the Texas Economic Development Act, cleverly structured to allow local governments to offer tax breaks to specific businesses that they don't have to pay for -- the program ultimately shifts the financial burden to the state.  A recent audit of subsidies from this program by the Texas Comptroller General (see p. 4) found energy to be the largest beneficiary sector, capturing nearly 60 percent of total subsidies granted to date.  The audit found total gross tax benefits of $713 million to renewable energy (for 61 projects), and additional $501 million in subsidies for two planned nuclear reactors.