About Those Oil Subsidies. Why are Tax Breaks Considered "Subdisidies" by our government?

American Thinker ^ | 05/02/2011 | Randall Hoven

[SeekAndFind]

Everyone wants to end subsidies to oil companies, from President Obama to John Boehner and Paul Ryan.  My question was "What subsidies?"  Remarkably enough, CNN Money provided the answer.

It turns out that they are all tax "breaks."  I even hesitate to call them "breaks" because some of them amount to little more than Congress defining accounting terms such as "capital equipment."  And the total amount of earnings not collected in taxes (which liberals define as a "subsidy") is about $4 billion per year.  Here is how that breaks down.

Domestic manufacturing tax deduction -- $1.7 B.  This is a tax deduction given to every manufacturer in the US.  Per CNN, it was "designed to keep factories in the United States."  If that deduction were eliminated for oil companies only, it would mean singling out oil companies from all other manufacturers.

Percentage depletion allowance -- $1 B.  Any industry can write down a portion of the cost of its capital equipment as part of the cost of doing business.  Right now, oil in the ground is treated as capital equipment.  Again, this "subsidy" amounts to how the cost of doing business is defined.  All companies get it, not just oil companies.

Foreign tax credit -- $850 million.  Companies get credit for taxes they pay to other countries.  All companies get this "subsidy," not just oil companies.  Should a company pay tax on tax?  Should only oil companies pay tax on tax?

Intangible drilling costs -- $780 million.  According to CNN, "[a]ll industries get to write off the costs of doing business, but they must take it over the life of an investment. The oil industry gets to take the drilling credit in the first year."  Among these four tax "breaks," this smallest one was the only one that treated oil companies differently.

The above tax "breaks" explain how much tax revenue is not collected from all oil companies.  How much is collected?

Exxon recently released its first quarter results for 2011.  The number grabbing the headlines was Exxon's profit: $10.65 billion in a single quarter.  The number not given quite as much exposure was the taxes it paid in that same quarter:  $8 billion, or 42% of income before taxes.

And what does Exxon do with all that money it has left after paying $8 B in taxes?  It put $7.8 billion into capital and exploration, as part of its plans "to invest between $33 billion and $37 billion per year over the next five years to develop new energy supplies."

In any other industry, that would be called "research and development."  Exxon is plowing 73% of its after-tax profits back into R&D.  Who would be better at spending $4 billion of energy companies' earnings in an attempt to provide our energy in the future: the energy companies or Obama's energy czar?

Do you know what oil company does get US subsidies, and not just tax "breaks"?  Petrobras, Brazil's state-owned oil company.  According to the Wall Street Journal,

The U.S. is going to lend billions of dollars to Brazil's state-owned oil company, Petrobras, to finance exploration of the huge offshore discovery in Brazil's Tupi oil field in the Santos Basin near Rio de Janeiro. Brazil's planning minister confirmed that White House National Security Adviser James Jones met this month [August 2009] with Brazilian officials to talk about the loan.

Just to re-cap a few pertinent features of these "subsidies" to oil companies that Obama wants to cut.

• They are all tax "breaks," or earnings that oil companies get to keep, not money paid out from the US Treasury.
• The amount of earnings not collected in taxes is about $4.3 billion per year -- about 0.2% of this year's deficit and enough to fund about 10 hours of current US government spending.
• A full $3.55 billion of that amount (82%) is due to the way taxes are treated for all industries or manufacturers.  To change these tax laws only for oil companies would require singling them out among all industries for special mistreatment.  (I'm not a lawyer, but that sounds like a bill of attainder to me, something our Constitution forbids.)
• The only tax in which the oil industry seems to get special treatment compared to other industries is intangible drilling costs.  The amount of that subsidy?  That would be $0.78 billion per year -- enough to fund less than two hours of federal spending in 2011, and not even half the amount we are lending a foreign-owned and state-owned oil company for drilling offshore Brazil.
• Oil companies already pay tax rates of 40-50% of income.  For one company, Exxon, in one quarter of one year, that amount was over $8 billion, or almost double the so-called tax "subsidy" for all oil companies for an entire year.

If you think oil companies enjoy some special privilege because of the money they throw around Washington, DC, consider that the Oil & Gas industry ranked only 19^th in the amount of money contributed to politicians in the 2008 election cycle: $17.7 million.  Who was number one?  Lawyers, who contributed $126.9 million, or over seven times as much as the Oil & Gas industry.  The Education lobby gave $37.4 million, more than twice as much as Oil & Gas.

You might not realize it, but private oil companies don't own much oil.  Most oil in the ground, in fact 87% of the world's supply, is owned by state-owned companies, and most of that by OPEC countries and Russia.  Exxon, for example, owns only 0.68% of worldwide oil reserves.  Venezuela owns 7.34%, more than 10 times as much as Exxon.  What Exxon does is explore, drill, transport, refine, and distribute.  It makes its money by doing things, not by sitting on capital.

According to the DOE's Energy Information Administration, every time you fill up your gas tank, more of your money goes to taxes than goes to refining costs and profits combined.

Having said all that, go ahead and get rid of that special treatment of intangible drilling costs.  Make oil companies write them down over the life of their investments, not just one year.  Increase corporate taxes in the US, where corporate tax rates are already highest in the world.  Collect enough money to fund the federal government for two hours.

And of course, tell your constituents you don't kowtow to those big, bad oil companies.  Unless they're owned by Brazil.

Randall Hoven can be followed on Twitter.

[SeekAndFind]

Obama and Boehner's definition of oil susbidies looks like this to me --

IF I DON'T TAKE MORE MONEY FROM YOU FROM YOUR COST OF DOING BUSINESS, I AM THEREFORE SUBSIDIZING YOU.

(Am I missing something?)

[MrB]

The thing you’re [not] missing is that the elitist ruling class believes that all wealth in the country belongs to “the government”, under their special control, because the wealth was created and accumulated due to their special stewardship of the country through the government.

So, anything they don’t take, they’ve “given” to you.

[all the best]

It just reveals how they think about us, our lives, our assets. It all belongs to them. Anything that they graciously allow us to keep is a gift.

[TSgt]

Okay, I’ll bite.

When your PROFITS are in the billions why do you need such subsidies?

I’m all about incentivizing business but am not sure we are incentivizing the right businesses.

We need to do more for small businesses. They employ most Americans and their operations are usually U.S. based.

[mountainlion]

Why is there no mention of subsidies for unions, large banks and even $3T to the world bank.

[T-Bird45]

It just reveals how they think about us, our lives, our assets. It all belongs to them. Anything that they graciously allow us to keep is a gift.

That's it in a nutshell - well stated. A basic misunderstanding of the proper order of the horse and the cart.

[pingman]

While you’ll never hear in on the MSM,these same tax rules apply to all oil exploration companies. While the Exxon/Mobils are high profile and easy to target, the small wildcatters rely upon these rules to offset their losses when drilled holes turn out dry. Without them, many small outfits will go tits-up.

[cvq3842]

Every business is allowed tax deductions for business expenses, including research and development, depreciation, etc.

I frankly expect Obama to be either lying or clueless about things like this. but the Republicans should know better! Or are they just paralyzed by fear?

[SeekAndFind]

RE: When your PROFITS are in the billions why do you need such subsidies?

---

A subsidy for me is when I use tax payer dollars to PAY YOU/HELP YOU do your business.

If I don’t TAKE more money from your business, why should that be called a subsidy? It should be called NOT TAXING YOU MORE.

What you should be saying then is when your PROFITS are in the billions, you don’t need more TAX BREAKS.

Put it another way,

What you should be saying then is when your PROFITS are in the billions, YOU NEED TO BE TAXED MORE THAN WHAT YOU’RE ALREADY PAYING IN TAXES.

That tells us that the government should NOT allow huge, profitable companies to keep more of what you earn.

Therefore when people say they don’t want “susbidies” for Exxon, they are NOT really complaining about government taking from tax payers to GIVE them more money to do them, what they actually and really want is for the government to TAX THEM MORE.

WORDS MEAN THINGS and the sooner we use and understand the right term and idea, the better.

[antiRepublicrat]

Right now, oil in the ground is treated as capital equipment.

This is singling out the oil industry too, and it doesn't sound right. A fisherman can claim his boat and nets as capital equipment, but not the fish.

[jjotto]

Calling a tax deduction or tax credit a ‘subsidy’ is used by everyone for arrangements of which they disapprove. Happens right here on FR all the time!

[thackney]

Good Article, thanks for posting.

BTTT

[thackney]

When your taxes are 200~400% of your profits, how can they be claimed as subsidies?

Governments don't subsidies oil companies, oil companies subsidies governments.

[hosepipe]

Sarah Palin made this issue very easy to understand..
Showing she knows much of this issue..

[piytar]

When your PROFITS are in the billions why do you need such subsidies?

Didn't read the article, did you? First, these aren't really subsidies. They're (mostly) normal tax deductions.

Second, mentioning that it's "billions" in profits is misdirection. When there are TRILLIONS in capital costs and many more BILLIONS in operating expenses, "billions" in profits is to be expected. If there aren't evil "billions" in profits, the industry will collapse.

BTW, what are profits? Used to be people understood thoses to be a GOOD thing for reinvestment, raises, and paying shareholder (many of whom are pensioners through mutual funds). So who would you be really hurting by cutting profits?

The ROI is about 8% for oil. That's pathetic. Frankly, I'm surprised the industry can function at that level. Most other industries have a MUCH higer ROI. But let's cut it further and then be "surprised" when we "unexpectedly" have a (further) energy shortage.

Finally on this point, because I'm not economically illiterate, I understand that taxing away these "subsidies" would do little more than increase the cost of energy, the last thing we need right now.

I’m all about incentivizing business but am not sure we are incentivizing the right businesses.

It's not "incentivizing." It's normal tax practice that allows them to have an anemic ROI compared to costs. See above.

We need to do more for small businesses. They employ most Americans and their operations are usually U.S. based.

Small business is VERY important, but without energy and without large businesses that buy a LOT from small business, those small business don't stand a chance.

[BfloGuy]

When your PROFITS are in the billions why do you need such subsidies?

You're missing an important point: their profits are in the billions but their costs are in the hundreds of billions. It isn't the amount a company makes that determines its profitability -- it's the percentage of the profits as compared to its outlay.

The oil companies typically make 7% or 8% profit which is comparable to any other well-run business. I agree with your point about small business, but we don't need to sacrifice large businesses at the same time.

They're not unimportant to the economy.

[Puddleglum]

Percentage depletion allowance -- $1 B. Any industry can write down a portion of the cost of its capital equipment as part of the cost of doing business. Right now, oil in the ground is treated as capital equipment. Again, this "subsidy" amounts to how the cost of doing business is defined. All companies get it, not just oil companies.

This seems odd to me. I can understand writing off the cost of a piece of hardware depreciating, but this does not seem to fit that mold.

[thackney]

The oil reservoir is a depreciating asset. The quantity of oil left in the ground continues to go down as it is produced.

[bert]

I was of the opinion oil in the ground was treated as an asset, inventory, not capitol equipment. The depletion allowance is for a reduction of inventory.

There are also undoubtedly other tax breaks for capitol equipment similar to those for all other business.

I think the article is flawed.

[piytar]

“This is singling out the oil industry too, and it doesn't sound right. A fisherman can claim his boat and nets as capital equipment, but not the fish.”

One big difference: Did the fisherman have to buy the fish in the ocean? Nope. Well, the oil companies have to buy or lease the land they drill, the costs of which includes the cost of the oil.

In business, if you have to buy it, you get to deduct the value of that expense over time. Simple example: BEOC (Big Evil Oil Company) spends $1B on an oil lease. One of their “costs of doing business” is that $1B they spent on the lease. BEOC gets to deduct a PART of that each year as a “depletion allowance.” They don't even get a break for the entire amount they spent in the year they spent it — the deduction gets spread out over years.

But Obama wants to take that away. Now, that's a recipe for a killing an industry.