Louisiana

Earth Track is pleased to release A Review of Fossil Fuel Subsidies in Colorado, Kentucky, Louisiana, Oklahoma, and Wyoming.  The report documents hundreds of subsidies to established fossil fuel industries and fossil fuel consumers in five U.S. states.  Many of these policies have contributed to environmental damage, energy market distortions, and fiscal shortfalls.

Political power drives state subsidies to fossil fuels

The United States news cycle as of late has been focused on the pending "fiscal cliff," a combination of automatic spending cuts and tax increases that put at risk the country's emergence from recession.  In an effort to flag ways to safely cut the US' burgeoning deficit, an unwieldy array of special tax breaks, often the result of political deals over many decades, have finally gotten some attention. 

Yet the very same political drivers that have led to subsidizing powerful industries at the federal level have flourished at the state level as well.  And in many states, among the most powerful industries are those involved with coal, oil, and natural gas.

These subsidies have come through the operation of the state tax code to be sure, but also through every other available mechanism of government market intervention -- a list that includes subsidized credit and insurance, infrastructure provision, unfunded oversight, direct grants, and below-market resource sales.   And, just as these other types of support have received insufficient attention in federal fiscal cliff discussions, they are too often ignored at the state level as well.

This report is a first pass at inventorying the subsidies.  We have no illusion that we have captured everything.  But we hope that others will continue to build on this inventory so that the full scale of state-level support for the fossil fuel sector will gradually become visible.

Even based on the subset of policies we have captured, it is clear that these programs have contributed to the fiscal turmoil in which so many state governments now find themselves, and to significant environmental degradation as well.

Filling in subsidy data gaps at the sub-national level

Although data on fossil fuel subsidies around the world have been growing, most of this information focuses on national level policies.  The thousands of subsidies at the state, provincial or local levels are largely untracked -- with little systematic documentation either in the United States or in most other countries of the world. 

These gaps are unfortunate:  in the aggregate, sub-national subsidies transfer billions of dollars per year to fossil fuel industries just like their federal counter-parts.  They are additive to federal supports, further distorting the economics of specific projects and investment incentives across energy options.  This review also illustrates that not only are subsidies purposefully targeted to oil, gas or coal large, but that the fossil energy sector captures a significant share of more general state incentive programs as well.    

There is a great deal of money at play.  The Tax Exemption Budget for the US state of Louisiana, for example, contains a dizzying array of exemptions, exclusions and reductions that, all told, manage to forego three quarters of the state's corporate income tax revenue, more than half of its sales tax revenue, and nearly one-third of its severance tax revenue.  Severance tax breaks in Louisiana were worth more than $350 million in 2010, nearly all benefiting the fossil fuel sector.  Colorado has so many exemptions and offsets to severance taxes that only five of the more than 30 oil-producing counties in the state paid any net severance taxes on oil and natural gas, according to past reviews. 

In Kentucky, public spending on coal haul roads comprised one of the state's largest subsidies to the coal sector in years past.  Yet, the spending is poorly documented, a common situation with spending on energy-related infrastructure across the states evaluated. 

Fossil fuel exemptions from state sales and motor fuel taxes are also frequent, and result in significant revenue losses to state Treasuries.  Yet, in many of these situations, blanket exemptions don't make sense and should be narrowed or eliminated.

Reducing market distortions:  high value targets for state fossil fuel subsidy reform

The patterns in fossil fuel subsidies across states offered a number of high value areas for reform.  Some of these are highlighted below:

1)  There is no excuse for not tracking your subsidies.  There are only a handful of states in the entire country that have no formal tax expenditure budget at all, but two of them (Colorado and Wyoming) were in our sample.  None of the states evaluated had centralized public reporting of the many different programs to provide credit subsidies to private activities and businesses.  Further, clear and consistent reporting on energy-related oversight and maintenance by governmental agencies and how it is funded was also largely missing.  In all of these areas, small improvements in reporting would pay large dividends to taxpayers.

2)  Don't ignore "general" subsidies when looking at subsidies to fossil fuels.  Subsidies flow to power.  Not always, not completely.  But often and mostly.  Fossil fuel industries are powerful, and they tap into any source of subsidy they can.  The review of subsidies to oil and gas in Louisiana illustrates this quite point well, with substantial portions of some of the "general" subsidies flowing to fossil fuel beneficiaries.

Subsidies flow to power.  Not always, not completely.  But often and mostly.

3)  Energy is a product, and should not be exempt from general state and local sales and use taxes.  This common exemption costs state Treasuries hundreds of millions of dollars per year, but is difficult to justify for most recipients.  Concerns about energy poverty are real, since energy is a life-sustaining good.  However, ensuring the poor have reasonable access to energy services is already a central part of utility regulation across the country and thus can be separated from the issue of energy taxation.  Lifeline rates, energy assistance programs, or other similar tools are well established to ensure the poor stay warm in cold climes and cool in warm ones.   Particularly given the negative externalities associated with most fuel use, there is no justification for blanket tax exemptions for fuel.

4)  Paying for the roads.  Resource-intensive states do a poor job tracking extra construction and maintenance costs triggered by the heavier vehicles and more frequent traffic that routinely accompanies fossil fuel extractive activities.  This data needs to improve, with costs pushed back onto the industries that trigger the costs rather than buried in state or local government road budgets. 

Similarly, most states use motor fuel excise taxes to pay for transport-infrastructure (primarily roads).  Yet, exemptions for many user classes that do use the roads (e.g., government vehicles) are common.  In other cases, the states exempt forms of transport such as rail, boats, or aviation from fuel taxes entirely because they do not use roads.  But where governments are also spending money on rail, water, or air infrastructure or oversight, different earmarking might be prudent, but full tax exclusion is not.  These types of cross-subsidies are fiscally and environmentally damaging.

5)  Subsidizing favored extraction activities needs a rethink.  States routinely subsidize forms of energy they produce domestically or that come from lower productivity mines or wells.  Some of these subsidies provide incentives to boost production or consumption of higher polluting fuels such as lignite or high sulpher coal. The policies are focused on protecting employment and extraction levels.  They implicitly downplay the impact of the subsidies on environmental quality or on the ability of other fuels or energy services to compete.   Tax exemptions for fossil fuels consumed or lost during the extraction process are also common. 

In all of these situations, a rethink is needed.  Fossil fuels in lower productivity wells are one type of marginal energy resource, but they are not the only one.  Subsidies should not put higher cost fossil fuels at a competitive advantage to other, often cleaner, substitutes.  

Conventional wisdom on propping up extractive industries as productivity declines is equally problematic.  Old wells are sometimes reopened as prices rise or technology improves, regardless of the state subsidies for doing so.  Further, the declining returns on old wells as costs rise and volumes drop really isn't that different structurally from what happens in many other businesses as technology and equipment ages, and new alternatives come to the fore.  Yet we don't see the tax code littered with subsidies to keep other declining productivity businesses going in the face of new competitors.  Government policy should be neutral with respect to aging industries rather than favoring polluting fossil fuels.

Summary

State subsidies to fossil fuels have been neglected for too long.  They are wide ranging, large, and often exacerbate environmental harm while also acting as a competitive impediment to emerging energy resources and improved energy efficiency to compete on an equal footing.  By inventorying these subsidies in five states, we hope to start a conversation on how to get rid of many of them, and to provide a foundation on which others can continue to expand the subsidy knowledge base.

Further reading

Readers interested in sub-national subsidies may also find the following three resources of value:

1)  OECD's inventory of fossil fuel subsidies.  OECD partially funded our work, and a some elements of this review will be included in their updated installment of fossil fuel subsidies within OECD countries.  Their most recent subsidy data can be accessed here.  The updated printed report is slated for publication in January 2013. 

2)  Good Jobs First Subsidy Tracker database.  This is the most extensive database I'm aware of covering a wide variety of state-level subsidies.  The coverage on grants and tax breaks is strong and growing.  But weaknesses in state reporting on other subsidy instruments reduce the ability of Good Jobs First to comprehensively track some of the other types of support.  Thus, coverage of credit and insurance subsidies, below-market sales of publicly-owned minerals, or state-provided goods or services in the energy sector is more spotty.  The values in the database can be viewed as a lower-bound estimate for total subsidies in a state.

3)  United States of Subsidies database from the New York Times.  Supplements information from the Good Jobs First database with additional sources, and provides a nice interface to facilitate tabulations of state-level subsidies to specific companies.  Not fossil-fuel specific.

A simple Google search for "Jindal incentive," looking for descriptions of incentives the Louisiana Governor has put on the table for all sorts of groups, brings back 1.6 million hits.  There are so many subsidy announcements that it's hard to imagine even a McDonald's restroom can be built in the state without a subsidy, or that Jindal has time outside of his incentive announcements to actually run the state. 

Billions in gifts, but detailed data as well

But the volume of subsidies is only half the picture.  What I found so interesting about Louisiana that while it does seem to massively subsidize everything, its tracking of the support is quite good relative to what I've come across in other states.  The staff involved with these programs were forthright and responsive.  Queries were dealt with quickly and accurately, providing documents able to show in detail who was getting what from the state. 

This mixture is striking.  The state's biennial Tax Exemption Budget runs more than 400 pages, with details on each provision that lets this group or that out of paying into the state coffers.  Aggregate data for each tax base is presented (see page 6), showing both actual collections and how much the State estimates they've given away.  Corporate tax collections were $198m, for example -- compared with exemptions from corporate taxation of $1,459 million.  They calculate more than 88% of the tax base is exempt.  Thirty-six percent of the tax base for severance taxes (i.e., oil and gas) was exempted somehow.  And the total exemption is likely much higher:  one properly should not credit severance taxes (which are payments to the state for giving up valuable natural resources) if the proceeds are simply plowed back into support services for the same sector.

Without the level of transparency that Louisiana has on its subsidies, there would be no way to assess whether the policies make sense, or whether there are better ways to meet whatever job and development goals have been set forth as justifications for the giveaways.  But the magnitude of the subsidies, and their persistence over time, is a stark reminder that transparency alone is not sufficient for subsidy accountability and contestability. 

With so much documentation of the amount given away, Louisiana should do much more to assess the return it is getting on those "investments."  It's "hidden budget" is now as big as what the state is actually collecting in revenues.

Distribution of GO Zone Bonds is Skewed

There is another important lesson in Louisiana's data as well:  even "general" subsidies to job creation and investment tend to disproportionately favor the entrenched and powerful industries.  Louisiana's allocation for a special class of tax-exempt bonds, the Gulf Opportunity Zone Bonds (GO Zone), illustrates this. 

GO Zone Bonds were authorized by Congress in 2005 to help the states most hurt by Hurricane Katrina to rebuild.  Louisiana received the largest capacity of the Gulf states.  By the end of the program in December of 2011, it had used just about every bit of capacity (unused capacity by some accounts was less than 200 dollars) it had been granted.

Using data provided to us by the Louisiana State Bond Commission, we grouped recipients by industry.  Fossil fuel-related recipients included pipelines and fossil fuel storage, fossil-fueled power plants, extractive operations or firms supplying those operations, and chemical production reliant on fossil fuel feedstocks.  In some cases, a recipient project would related to other sectors as well as fossil fuels; these were included in a split category.  Some key findings from this exercise:

• Fossil fuel-related recipients received 57% of the $7.8 billion in bond capacity issued.  Once joint projects are included, this jumps to 65%.  This fossil fuel sub-group also had a higher success rate than other sectors, with 53% of the applications being allocated capacity (versus 32% for all applicants) and 76% of the allocated capacity ultimately being issued (versus 48% for all sectors).
• Two fossil fuel-related projects received the right to issue $1 billion in bonds each -- a Marathon Oil Corp. refinery and a Lake Charles Petroleum Coke Gasification Project.  Many other projects received tax exempt capacity in the hundreds of millions of dollars. 
• The program was highly popular, with applications for all projects three-times the level of available funding.  About half of the capacity that received an initial allocation under the program did not end up being able to issue bonds, however.
• Applications by plant-based biofuels firms were $1.5 billion, of which about $1.2 was allocated.  Yet, the sector ended up getting nothing (though a sugar facility and animal-fats biofuels project did receive GO Zone capacity).

The table below summarizes this key data.  A full listing of the applications, sorted by industry, can be found here.

Summary of GO Zone Applications and Issuance by Sector