The Creeping Menace of Long-Term Bailouts

Recent, massive bailouts for the banking and automotive industries got plenty of media attention. But our government was more quietly propping up plenty of other industries long before 2008's financial crisis. That helping hand could have huge implications for investors -- especially if it's withdrawn.

Even if you've heard about federal aid for corn and dairy farmers, at least one subsidized industry might surprise you. According to The New York Times, "[O]il production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process." The Congressional Budget Office (CBO) released a study in 2005 revealing that the oil industry's capital investments were taxed at an effective rate of 9%, well below the 25% average rate for businesses in general.

Effective tax rates vary hugely among industries. Check out the following numbers from the CBO study, among the many businesses that receive government relief:

While it's good to know the status quo, it's also smart to remember that the status quo can change -- especially as our nation faces tough financial challenges. The government's search for additional income includes potential spending cuts and tax increases, which could relieve some industries of their federal assistance. Admittedly, with oil companies such as ExxonMobil (NYSE: XOM) raking in billions in profits each year, it might seem reasonable to cut back on the tax relief we offer them. But Big Oil's lobbyists may be able to persuade Congress otherwise.

There goes the sun
When subsidies do get tweaked, investors should take notice. Germany, for example, has been cutting its subsidies for solar energy, which spells bad news for American solar enterprises such as First Solar (Nasdaq: FSLR). The company got 65% of its revenue from Germany last year.

Here in the U.S., there's talk of cutting the ethanol industry's current $6 billion in tax credits. These mostly go to oil companies, to get them to mix ethanol in with their conventional fuel. BP (NYSE: BP) is expected to receive as much as $600 million in credits this year. Archer Daniels Midland (NYSE: ADM), the nation's largest ethanol producer, also benefits from these payouts.

Those who object to the subsidy suggest that the oil industry should be investing in alternative fuels such as ethanol on its own, without government prodding. The recent debacle in the Gulf, which vividly illustrated the dangers involved in traditional energy production, would seem to support that argument.

Making matters worse, our corn-based ethanol is apparently far less efficient than sugarcane-based versions, suggesting that we're betting on the wrong horse in the ethanol race. Brazil's oil powerhouse Petroleo Brasileiro (NYSE: PBR) seems to have seen the light; it's begun investing in local sugar ethanol producers.

In other subsidy-shrinking news, 16 companies that insure crops, including Wells Fargo (NYSE: WFC) and Ace Limited (NYSE: ACE), have agreed to a $6 billion subsidy cut for crop insurance over the coming decade. Interestingly, the government argued in pushing for the cut that the companies raked in excessive profits. Apparently, the insurers couldn't successfully dispute that.

As citizens, we should care about and support measures that foster the long-term health of our nation. As investors, we need to focus on our own long-term financial health. Many companies currently enjoy government-provided tailwinds that can make them attractive now, but potentially troubling later. Unlike their revenue and income, these companies haven't earned their federal subsidies, and they may not be able to count on them for much longer.