Pennsylvania Fossil Fuel Subsidies: An Overview

Pennsylvania is subsidizing fossil fuels at a cost of almost $2.9 billion per year.  Use of these fuels burdens taxpayers with additional non-monetized externalities such as air, land and water pollution and the associated negative human health and property impacts. Since many of these subsidies were passed years or decades ago, Pennsylvania’s current policymakers may not all be aware that these subsidies exist or understand their cumulative impacts.

Federal level subsidies reduce the amount of taxable income that fossil fuel companies are required to report to Pennsylvania for state taxes. Further, Pennsylvania tacks on additional subsidies such as tax breaks and grant programs that benefit the use or production of fossil fuels.

The state’s fossil fuel subsidies come primarily in the form of tax exemptions, with only a handful of applicable tax credits and grant programs.  The primary manner in which Pennsylvania subsidizes fossil fuels is through Sales and Use Tax exemptions. For specific entities that represent some of the largest energy purchasers and users in the state – including government, public utilities, manufacturers, coal mining companies and residential consumers – purchase and use of many types of fossil fuels are exempt from Sales and Use Tax. As an example, when a Pennsylvania manufacturer buys natural gas to use as fuel in the production of his product, that purchase of natural gas is exempt from Sales and Use Tax. It should be noted that producers of electricity also enjoy subsidies as the purchase of equipment, machinery, supplies (including fuel) used to produce electricity for resale are exempt from Sales and Use tax. Electricity subsidies benefit fossil fuel, nuclear, and renewable energy, yet discourage energy efficiency. This report assumes that since 63 percent of Pennsylvania’s electricity mix is supplied by coal, natural gas and oil (with nuclear supplying 34 percent and renewables, hydro and other resources supplying 2.8 percent), subsidies for electricity generation, distribution, sales or consumption should be considered fossil fuel subsidies.

Sales and Use Tax exemptions are an example of Pennsylvania foregoing revenue in order to make the energy provided by fossil fuels less expensive for the end user or more profitable for the producer or seller. Renewable energy, such as wind, solar, and geothermal, relies on non-depletable resources that are not tradeable commodities that fit easily into the current tax structure. For example, how would one tax the energy from the sun used by photovoltaic panels to produce electrical energy? There is no sales transaction taking place for the sun’s energy, no seller of the sun’s energy, and no fuel commodity to tax.

Additional fossil fuel subsidies come in the form of exemptions from the Gross Receipts Tax, Liquid Fuel and Fuels, Oil Company Franchise Tax, and a host of property and realty tax exemptions. One costly exemption from local property taxes for oil and gas property was the result of a Pennsylvania Supreme Court interpretation of a law passed by the General Assembly. Tax credit programs include the Coal Waste removal tax credit and the Alternative Energy Production Tax Credit. One grant program, the Alternative Fuel Incentive Grant program, was identified as supporting natural gas, electric and coal-based fuels, vehicles and related investments.

There are many fossil fuel subsidies that have been identified that do not have cost estimates available. Therefore, the $2.9 billion annual fossil fuel subsidy cost is likely to be an underestimate of actual costs.