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Subsidies

Definition of Farm, Oil and Other Government Subsidies

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Each year, the U.S. Federal government subsidizes a wide range of economic activities it wants to promote. What exactly are subsidies? The definition may be broader than you think. Find out about the most well-known subsidies, the history of these subsidies, and some of their costs.

What Are Subsidies?

subsidies
Subsidies are usually defined as money directly given by the government to businesses to encourage activities that it wishes to promote. The amount of the subsidy is often based on the amount of the goods or services provided. Subsidies can also be given by one level of government to another. This usually means Federal grants given to state or local governments, or even state grants given to municipal governments. (Source: Bureau of Economic Analysis, Subsidies)

The World Trade Organization (WTO) has a broader definition of subsidies. It considers a subsidy to be any financial benefit provided by a government that gives an unfair advantage to a specific industry, business or even individual. The WTO mentions five types of subsidies:

  1. Cash subsidies, such as the grants mentioned already.
  2. Tax concessions, such as exemptions, credits or deferrals.
  3. Assumption of risk, such as loan guarantees.
  4. Government procurement policies that give more than the free-market price.
  5. Stock purchases that keep the company's stock price higher than market levels.
These are all considered subsidies because they reduce the cost of doing business. (Source: World Trade Organization, World Trade Report 2006, "Defining Subsidies")

Farm Subsidies

Farm Subsidies
Many experts argue that U.S. farms don't even need subsidies. After all, they are located in one of the world's most favorable geographic regions: rich soil, abundant rainfall, and access to rivers for irrigation when rainfall fails. In addition, today's farms have all the advantages of modern business: highly trained labor, computerized equipment, and cutting-edge chemical research in fertilizers and seeds.

However, America's food supply must also be protected from droughts, tornadoes, and recessions. In fact, agricultural subsidies were originally created to help farmers ravaged by the Dust Bowl and the Great Depression of 1929. This price support system lasted until the 1990s.

Basically, the Federal government guaranteed farmers a high enough price to remain profitable. How did it do this? It paid farmers to make sure supply did not exceed demand. First, the government subsidized farmers to idle crop lands to prevent over-production. Second, it bought excess crops, and either stored them or gave them away to feed low-income people throughout the world.

Most subsidies went to farmers of grains, such as corn, wheat and rice. That's because grains provide 80% of the world's caloric needs. By 1999, farm subsidies had reached a record $22 billion. (Source: U.S. State Department, American Agriculture: Its Changing Significance)

Between 2001-2006, farm subsidies tapered off a bit, averaging $19 billion a year. Of this, possibly 15% billion was wasteful, unnecessary or redundant. Between 1995-2010, farm subsidies had ballooned to $52 billion a year on average. Of this, more than 6% went toward four "junk food" components: corn syrup, high fructose corn syrup, corn starch and soy oils. Many people wondered why the Federal government was subsidizing food that contributed to America's obesity problem. (Source: Huffington Post, Billions in Farm Subsidies Benefit Underwrite Junk Food; Food Safety News, AG Subsidies Fund Junk Food, September 22, 2011)

During the recession, as lawmakers looked for ways to cut the budget, many asked "Do corn growers need subsidies?" In 2011, a record 14 billion bushels of corn was produced. In 2012, 94 million acres of corn were scheduled to be planted -- more than in any year since World War II. (Source: Washington Post, Harvesting Cash, December 2006)

As a result, the FY 2012 budget proposed a 22% cut to farm subsidies, including the $5 billion direct payment program. Half of farmers receiving subsidies made more than $100,000 a year. In fact, 74% of farm subsidies went to just 4% of the businesses. The House budget also proposed $180 billion in cuts to the farm subsidy program. However, $133 billion would come from the food stamp program, affecting 8 million consumers, not farmers. (Source: San Jose Mercury News, Subsidizing Big Ag, April 19, 2012)

Oil Subsidies

Oil Subsidies
In March 2012, President Obama called for an end to $4 billion in oil industry subsidies. However, some estimates indicate that the real level of oil industry subsidies is higher, between $10-$40 billion. At the same time, oil company profits have benefited as oil prices reached a new record of $145 a barrel in 2008. (Source: Christian Science Monitor, Taxpayers Shouldn't Subsidize Oil Industry Profits, March 29, 2012)

Oil industry subsidies have a long history in the U.S. As early as World War I, the government stimulated oil and gas production to ensure a domestic supply. As recently as 1995, Congress established the Deepwater Royalty Waiver Program. It allowed oil companies to drill on Federal property without paying royalties. It encouraged this expensive form of oil extraction because oil was only $18 a barrel. The Treasury Department reported that the Federal Government has missed $50 billion of foregone revenue over the program's lifetime. It argued that this may no longer be needed now that deepwater extraction has become profitable. (Source: Energy Information Administration, Federal Energy Subsidies; LA Times Oil Companies Have a Rich History of Subsidies, May 25, 2010)

Here is an summary of 2011 oil industry subsidies compiled by Taxpayers for Common Sense in its report, Subsidy Gusher.

  • Volumetric Ethanol Excise Tax Credit - $31 billion.
  • Intangible Drilling Costs - $8.9 billion.
  • Oil and Gas Royalty Relief - $6.9 billion.
  • Percentage Depletion Allowance  - $4.327 billion.
  • Refinery Equipment Deductions - $2.3 billion.
  • Geological and Geophysical Costs Tax Credit - $698 million.
  • Natural Gas Distribution Lines - $500 million.
  • Ultradeepwater and Unconventional Natural Gas and other Petroleum Resources R&D - $230 million.
  • Passive Loss Exemption - $105 million.
  • Unconventional Fossil Technology Program - $100 million.
  • Other subsidies - $161 million.

Some organizations, such as Greenpeace, argue that oil industry subsidies should also include these additional activities:

  • The Strategic Petroleum Reserve.
  • Defense spending that involves military action in oil-rich countries in the Persian Gulf.
  • The construction of the U.S. Federal highway system, which encourages reliance on gas-driven cars.
However, the BEA argues that these Federal government activities were primarily done to protect national security, not promote specific activities within the oil industry. They may have benefited the industry indirectly, but the intent was not to directly subsidize it.

Ethanol Subsidies

Photo: Tim Boyle/Getty Images
Since 1979, the corn industry has received $20 billion in Federal subsidies, recently reaching $6 billion a year. The purpose was to divert production into ethanol, a component of gasoline. The subsidies were to help producers meet a 2005 Federal law that required 7.5 billion gallons of renewable fuel be produced by 2012. In 2007, a revision increased the goal to 36 billion gallons by 2022. Only 6.25 billion gallons were produced in 2011.

The corn subsidy, a tax credit of $.46 a gallon, ended in January 2012. However, ethanol producers would like to see a larger credit, of $1.10 per gallon, remain. This credit is to continue further research for cost-effective ways to convert other bio-fuels, like switch-grass, wood chips and non-food corn byproducts. (Source: MSNBC.com, Ethanol Subsidy Dies But Wait There's More, December 29, 2011; NPR, Congress End Era of Ethanol Subsidies, January 3, 2012;

Once the corn subsidy ended in 2012, ethanol producers were left with a bit of a glut. However, they expect demand to strengthen for three reasons:

  1. The glut resulted from gasoline refiners stocking up on subsidized ethanol before prices went up. The glut will be absorbed in time.
  2. Demand will increase during the U.S. summer driving season.
  3. Growing markets, such as Brazil, can't keep up with their own need for ethanol, and are looking to import it from the U.S. (Source: NPR, Ethanol Subsidy Loss, February 28, 2012)

Converting corn for fuel became highly controversial when it helped drive food prices higher in 2008, causing food riots throughout the world. However, part of the high price for corn and other commodities was because investors fled to the commodities markets in response to the global financial crisis of 2008.

Many exports argue that using corn for fuel is a poor allocation of natural resources when 60% of the world's population is malnourished. Furthermore, corn is not an efficient fuel source. Even if all the corn in the U.S. was converted to ethanol, it would only meet 4% of America's fuel consumption needs. (Source: Harvard International Review, Corn Ethanol as Energy, October 26, 2009)

Export Subsidies

Export Subsidies
Export subsidies are prohibited by the WTO. However, there are two U.S. Federal Government export subsidy programs to help U.S. farmers compete with other countries' subsidized exports. These programs are allowed by the WTO. The U.S. Department of Agriculture promotes:
  • The Export Credit Guarantee Programs provides commercial financing to enable the exports of U.S. farm products. Specifically, the USDA guarantees the credit of foreign buyers when they can't get credit approval locally.
  • The Dairy Export Incentive Program (DEIP) pays cash subsidies to dairy exporters to help them meet the subsidized prices of foreign dairy producers. (Source: USDA, Export Programs)

Housing Subsidies

Housing Subsidies
Housing subsidies promote homeownership and support the homebuilder industry. They take two forms: interest rate subsidies and down-payment assistance. The primary interest rate subsidy is the mortgage interest deduction on the Federal income tax. There are also some smaller interest subsidies, such as tax exemptions on municipal bond interest used to subsidize mortgages for low-income families. They total about $15 billion a year. The Federal government also matches the amount low-income families save for a downpayment. This came to only $10.9 million in 2008. (Source: O. Emre Ergungor, Federal Reserve Bank of Cleveland, Homeowner Subsidies, February 23, 2011)

These direct homeowner subsidies paled in comparison to what the Federal government spent to support its FHA mortgage loan guarantee program. The real trouble started when it created two government-sponsored enterprises, Fannie Mae and Freddie Mac, to provide a secondary market to buy these mortgages from banks. When they bought too many subprime mortgages, the government spent $130 billion to bail out Fannie and Freddie, and eventually nationalize them. Was the bailout a subsidy? Yes, in a sense, because without it, there would have been no housing activity whatsoever after the subprime mortgage crisis. That's because Fannie, Freddie and the Federal Home Loan Guaranty Corporation were behind 90% of all home loans, effectively replacing the private sector's role in the home mortgage market in the U.S.

Other Subsidies

The U.S. Federal Government offers many more subsidies that it thinks will improve the economy. For example, the Cash for Clunkers program in 2009 was considered a subsidy to the auto dealer, according to the BEA. In this program, the dealer received a $3,500-$4,500 subsidy from the Federal government after discounting a new vehicle to a consumer who traded in an old car. The goal was to jumpstart the economy after the recession, and to encourage people to buy more fuel-efficient vehicles and lessen U.S. reliance on foreign oil. (Source: BEA FAQs, How Is the CARS Program Reflected in the National Income and Product Accounts (NIPAs)?) (Article updated April 20, 2012)
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