What Are Government Subsidies?

Government Subsidies Explained

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Each year, the U.S. federal government subsidizes a wide range of economic activities that it wants to affect. Subsidies are cash grants or loans given to particular industries to promote growth or impact business and consumer behavior.

Find out about the most well-known subsidies, the history of these subsidies, and some of their costs.

Definition and Examples of Subsidies

Most subsidies are cash grants or loans that the government gives to businesses. It encourages activities the government wishes to promote. The subsidy depends on the amount of the goods or services provided.

For example, the U.S. government has long supported the agricultural industry through cash subsidies given to farmers to help control the supply of essential crops.

  • Alternate Definition: The World Trade Organization has a broader definition of subsidies. It says a subsidy is any financial benefit provided by a government which 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 above.
  2. Tax concessions, such as exemptions, credits, or deferrals.
  3. Assumption of risk, such as loan guarantees.
  4. Government procurement policies that pay more than the free-market price.
  5. Stock purchases that keep a company's stock price higher than market levels.

These are all considered subsidies because they reduce the cost of doing business. 

One level of government can also give subsidies to another. This includes federal grants given to state or local governments and state grants given to municipal governments

How Subsidies Work

The government can subsidize an industry in a number of ways—through direct funding, loans, tax breaks or credits, the elimination of fees or penalties, etc.—but all of these amount to the same thing: financial support. And simply put, when an industry has more money (or fewer expenses) it can do more business.

Subsidies are typically created to work with the industry at hand, so there is no one-size-fits-all formula. In the farming industry, for example, the government may assume the role of customer and directly buy farm products on a yearly contract. Or they may pay farmers to produce certain crops, or to avoid overproduction.

In the oil industry, the government may enact subsidies that look like tax relief for the cost of extracting fossil fuels.

Some economists are opposed to government subsidies. They believe these end up doing more harm than good in the long run.

Types of Subsidies

The U.S. has implemented many subsidies and in many forms, supporting everything from ethanol to used cars, but here are some of the major players.

Farm Subsidies

Agricultural subsidies were originally created to help farmers ravaged by the Dust Bowl and the Great Depression of 1929. 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. The government subsidized farmers to keep croplands idle in order to prevent overproduction. It also bought excess crops. It then either stored them or gave them away to feed low-income people throughout the world.

Over time, the agricultural subsidy program grew massively, though its original intent may have been buried. Between 2013 and 2022 the average spending on farm subsidies was about 17.6 billion a year on average.

Here are some major touchpoints in subsidized farming in the U.S. in more recent history:

  • Between 2010 and 2019, farms received subsidies averaging more than $74,000 a year. During this time about 75% of subsidies went to medium or large farming operations, with the average small farm household receiving little or no payments, even though 89% of farms were small family farms.
  • By 2017, large farms dominated the industry. Farms generating $1 million or more in sales produced two-thirds of the nation's agricultural output. Only 4% of farms were that large. Big farms gobbled up small ones that couldn't compete. They relied on economies of scale to produce more food at a cheaper price. That sent prices down even more, putting more small farmers out of business.
  • In 2018 and 2019, the Trump administration increased farm subsidies by an additional $23 billion under the Market Facilitation Program.
  • In 2020 the U.S. Department of Agriculture announced two rounds of direct payments under the Coronavirus Food Assistance Program, valued at about $30 billion added to the existing farm subsidies.

Oil Subsidies

The oil industry subsidies have a long history in the United States. As early as World War I, the government stimulated oil and gas production in order to ensure a domestic supply.

In 1995, Congress established the Deep Water Royalty Relief Act. It allowed oil companies to drill on federal property without paying royalties. Ever since, the oil subsidy scene has been on a political yo-yo:

  • In March 2012, President Obama called for an end to the $4 billion in oil industry subsidies.
  • In 2018 President Trump's budget increased federal spending for the fossil fuel industry and created tax cuts to effectively eliminate taxes for coal and oil producers.
  • In January 2021 President Biden made a commitment to oil subsidy reform, but the follow-through is not guaranteed, and is difficult, as the subsidies are mainly embedded in the tax code.

Subsidies can often bring political and social critique. Greenpeace argues that the oil industry subsidies impede solutions to climate change and promote racist systems.

Export Subsidies

The WTO bans export subsidies. But it allows certain U.S. federal government export subsidy programs. They help U.S. farmers compete with other countries' subsidized exports. For example, the U.S. Department of Agriculture promotes the following programs:

  • The Export Credit Guarantee Program, which finances U.S. farm exports. The USDA guarantees the buyers' credit when they can't get credit approval locally.
  • The Facility Guarantee Program, which supports infrastructure improvements in countries that import U.S. agricultural goods, but not up to the full capacity due to inadequate facilities.

Housing Subsidies

Housing subsidies promote homeownership and support the construction industry. Housing subsidies come in two forms: interest rate subsidies and down-payment assistance. The biggest interest rate subsidy is the mortgage interest deduction on the federal income tax. There are also some smaller interest subsidies that reduce mortgage costs for low-income families.

These direct homeowner subsidies paled in comparison to what the federal government spent to support its Federal Housing Authority mortgage loan guarantee program.

The real trouble started when it created two government-sponsored enterprises. Fannie Mae and Freddie Mac provided a secondary market to buy these mortgages from banks. But they bought too many. That forced the government to spend up to $154 billion to bail out Fannie and Freddie.

Was the bailout a subsidy? Yes, in a sense. Without it, there would have been no housing activity whatsoever after the subprime mortgage crisis. Fannie, Freddie, and the Federal Home Loan Guaranty Corporation were behind 90% of all home loans in the year following the housing crisis. The agencies replaced the private sector's role in the home mortgage market in the United States.

Health Care Subsidies

The most notable example of a healthcare subsidy came in 2010 with the Affordable Care Act (ACA), or more colloquially known as "Obamacare." It aimed to provide access to healthcare for those who could not afford it, primarily low- and middle-income families, and those who work in jobs that don't provide health insurance. The subsidy portion of the plan is delivered directly to eligible citizens in the form of a tax credit.

In spite of a number of judicial challenges and political criticism, the ACA is still in effect through December 2022.

Automobile Subsidies

Another example of a less direct subsidy can be found in the changing automobile industry through the promotion of electric vehicles, though this can be thought of as an environmental subsidy as well. Starting in 2010 the Federal government began offering tax credits upwards of $2,500 for the purchase of plug-in electric vehicles. The credit increases for higher kilowatts, maxing out at $7,500. The tax perk incentivizes consumers and businesses to purchase electric vehicles, and as a result manufacturers have greater incentive to produce them.

Key Takeaways

  • Any financial benefit, whether cash or tax cuts, given by the government to businesses or government organizations is considered a subsidy.
  • Subsidies are given to help companies reduce their costs of doing business.
  • The U.S. government grants subsidies to many industries including oil, agriculture, housing, farm exports, automobiles, and health care.
  • Some economists are opposed to government subsidies, believing they end up doing more harm than good in the long run.

Frequently Asked Questions (FAQs)

Why are government subsidies controversial?

When the government gives money to a certain industry, it supports that industry's business, mission, and all the effects that go along with it. And it does so at the expense of the taxpayer. Federal spending always produces critiques, but subsidies are often viewed through a political lens, especially when they support industries that are polarizing or cause social harm.

When did government subsidies start in the U.S.?

After the Great Depression, the federal government took on a greater role in the social welfare of its citizens through the launch of the New Deal. The Agricultural Adjustment Program in 1933 was part of this effort. It protected farmers by setting prices and enacting measures to control supply and demand.

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  22. USDA Foreign Agricultural Service. "Facility Guarantee Program."

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