When President Obama and congressional leaders finally get around to striking a deal to raise the debt ceiling, it will likely include measures repealing at least some ethanol subsidies and oil and gas tax breaks, according to a majority of National Journal Energy and Environment Insiders.
Most insiders agree that renewable energy subsidies will get a reprieve this time around but will be front and center on the chopping block later this year. A whopping 70 percent said ethanol subsidies will be cut as part of a debt-ceiling deal. The experts cite two reasons: A 73-27 symbolic messaging Senate vote in June to repeal those subsidies and a deal announced last week by a trio of senators that puts most of the remaining ethanol subsidy to the deficit and keeps a sliver of it for biofuels and other renewable energy industries.
“The recent Senate vote to eliminate ethanol tax subsidies shows that Congress is willing to consider eliminating subsidies previously considered sacrosanct if they have large revenue impacts and no legitimate public policy rationale, like ethanol policy,” one insider said.
Essentially all energy subsidies except for oil and gas tax breaks ingrained in the tax code are set to expire at the end of this year anyway unless Congress renews them. Ethanol has triggered a political firestorm in the heat of the budget battles because of its hefty $5.4 billion to $6 billion annual price tag. Wind and solar subsidies, by contrast, have not garnered nearly the political opposition given the price tag is much smaller (about half the cost of ethanol subsidies, depending on what is included in the subsidy definition). That may bode well for the renewable industry now, but insiders warn those subsidies will probably not make it to 2012.
“I think they will quietly let the grant in lieu of the federal ITC [investment tax credit] expire at the end of the year as part of some of the dealing that occurs here,” one insider predicted.
NJ insiders were more split on the fate of oil and gas tax breaks, but a majority (59 percent) said that at least some of the tax breaks would be eliminated as part of the debt package (41 percent said none would be part of the deal). The devil is in the details: Congress must hash out which specific tax breaks to repeal and for which companies. Given the broader fights over Medicare and Social Security that’s garnering most of the attention in the debt-ceiling talks, it’s unclear how much momentum this type of discussion could get between now and August 2.
Insiders are mindful that any deal that repeals some oil and gas tax breaks will take intense negotiating and likely won’t be an across-the-board repeal of all subsidies for all companies. Regardless, some insiders say the politics of supporting Big Oil subsidies won’t make Republicans look good and could prompt a deal.
“Democrats will likely insist on elimination of certain oil and gas production tax breaks, and Republicans will probably accept this change, in part to avoid being portrayed as captive to big business,” one insider wrote.
Democrats’ calls to repeal subsidies for Big Oil gained a lot more traction when gasoline prices were nearing $4 a gallon earlier this year. Prices are higher than this time last year, but they have dropped to an average of $3.63, which is just below the tipping point when constituents get angry at politicians. That’s not lost on one NJ insider who predicts the debt deal will not include repealing any oil and gas tax breaks.
“There is a perception that some of the current economic woes are due to high gasoline prices, I think they’ll be too nervous to mess with the oil companies right now for fear they get blamed for a gas price spike,” an insider said.
Politically, the oil and gas lobby is the most powerful energy sector on Capitol Hill, even more than the ethanol industry, whose clout typically grows during election cycles when candidates seek to woo farm-state constituents who depend on corn-based ethanol. It’s also logistically harder to remove oil and gas tax breaks that are ingrained in the tax code than to remove subsidies that are set to expire regardless. All this bodes well for the oil and gas industry but not ethanol and renewable sectors.
One insider mused: “While changing the tax code for oil companies constitutes touching the third rail in conservative politics doing away with subsidies for ethanol does not.”
Do think Congress will eliminate any oil and gas tax breaks as part of a debt-ceiling deal?
- Yes 59%
- No 41%
“Democrats will likely insist on elimination of certain oil and gas production tax breaks, and Republicans will probably accept this change, in part to avoid being portrayed as captive to big business.”
“It’s likely there will be a token cut in some tax provision that can be labeled an oil-and-gas loophole.”
“But only some and only for the majors.”
“There is a perception that some of the current economic woes are due to high gasoline prices, I think they’ll be too nervous to mess with the oil companies right now for fear they get blamed for a gas price spike.”
“For Republicans in the House this would be touching the third rail of conservative politics—new taxes."
The President and the Democrats are just using the issue to try and score political points, but with the price of gasoline down from its near record highs of a month ago, their line in the sand rhetoric rings hollow.
Do you think Congress will eliminate subsidies for any of these energy sources as part of a debt-ceiling deal? (Check all that apply)
- Ethanol 70%
- Solar 19%
- Wind 16%
- None 27%
*Percentages do not add up to 100 because Insiders could check more than one category.
“Ethanol benefits from a tariff, subsidies and a mandate—enough! Ethanol is so first generation.”
“But other renewable industries need to be on alert.”
“To quote the Beach Boys; ‘Wouldn’t it be nice’ if all three boondoggles were repealed?…Usually these artificially imposed incentives eventually collapse under the weight of their own fiscal lunacy, as exemplified by the ethanol scam finally offending a majority of the Senate.”
Wind and Solar
“The Treasury grants will definitely be allowed to expire, and the tax credits are very vulnerable. When Germany & Spain are ratcheting back subsidies for uneconomic industries, it’s clear the ‘clean’ energy paradigm has shifted.
“Ethanol subsidies are scheduled to die at the end of the year—so why use up any capital fighting that battle now? Going after the ethanol mandates would be more meaningful, but also more challenging. So, probably nothing in this deal concerning ethanol.”
“The ethanol compromise that [South Dakota Republican Sen. John] Thune is crafting hasn’t been properly vetted and would not likely pass the House in its current form anyway.”
“Tough as it is to find ways to trim the budget, it’s really hard to picture the congressional champions of each of these domestic energy resources, fuels or technologies throwing in the towel. There’s just not a strong enough constituency for courageous belt tightening.”
This article appears in the July 13, 2011 edition of NJ Daily.