state subsidies

With so much focus on the US federal budget deficit, it is easy to forget that the directed legislation, subsidies, and political bias plaguing our national government exist at the state and local levels as well.  While this certainly complicates the process of trying to figure out who is getting what, Pennsyvlania Fossil Fuel Subsidies: An Overview, written by Christine Simeone at PennFuture, highlights that greater transparency is possible everywhere.

The report documents some of the long-lived biases in state tax codes that favor fossil fuel production and consumption.  For example, though nearly all goods and services have to pay a sales tax, fuel purchases don't.  This is clearly a subsidy that encourages more consumption.  Industry sometimes argues that fuels already pay too much relative to other industries.  Too often, however, those comparisons overlook the fact that many of the fuel taxes are not for general revenue purposes, but rather to pay for fuel-related infrastructure (e.g., roads), problems (mine reclamation or fuel tank cleanups), or in some cases even resource rents on the fuel being extracted. 

PennFuture's findings on taxes are generally in line with multi-state work done in the early 1990s by Joe Loper, then with the Alliance to Save Energy.   Loper's analysis is still among the best work I've seen on state-level energy subsidies.  He estimated that reductions or exemptions for energy from state sales taxes alone was worth $18 billion (1992$) per year.  At the time, rate reductions were highest for the residential and industrial sectors, and for gasoline.

There is probably room for dialogue on how to treat various tax exemptions in the subsidy tallies.  For example, if a particular fuel charge is earmarked entirely for roads, I wouldn't view agricultural exemptions as a subsidy so long as the vehicles using the fuel are used only on private roads.  In contrast, agricultural exemptions from fuel charges linked to general revenues or amelioration of fuel-ralated problems such as tanks would be a subsidy.  Another interesting issue involves governments exempting themselves from fuel taxes or charges, something the PennFuture report calls attention to.  The issue of "self-charging" comes in many forms:  not paying rent for space in public buildings or for services provided by other government agencies; getting discounted power from municipal utilities (an issue in my town); or not paying fuel taxes on energy used during government business. 

While at first blush instituting full cost recovery seems like a complicated way simply to have government pay itself, that view misses the core value of price signals.  Because governments compete with others (including other parts of the government) for space, energy, or other resources, charging full price is a necessary part of proper cost accounting and decision-making for government managers and for the taxpayers who fund them.  Full prices ensure governments see the proper incentives to invest in demand-reduction options (be it smaller offices or more efficient appliances), and that they contribute their fair share of public spending on energy-related clean-up or infrastructure.  It's useful to remember that corporations routinely charge different parts of their organization full price on required inputs for quite similar reasons.

What is striking about Simeone's listing of subsidies (see table below) is not just that a single state could potentially have tax subsidies favoring the use of conventional fuels of close to $3 billion per year, but also that PennFuture didn't do much to identify and quantify the many other non-tax subsidy mechanisms that exist in the state.  Pennsyvlania, for example, allows the use of waste coal to qualify under its renewable portfolio standards (albeit at a lower tier, and called "alternative" instead of "renewable").  PA is also an old coal state, and studies of TN, WV, and KY have found subsidies to coal roads and mine cleanup were large and continuing sources of government support to the fossil fuel sector -- spending that in some situations actually resulted in net losses to the state on coal operations.  Looking in more depth at some of these additional forms of support would seem a useful task for subsequent work.

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.