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.

[pnh102]

No company should pay any tax, and hence, not get any tax deductions. All these do is just raise the price of the product as WE pay the cost of the tax.

So yea, expand this "subsidy" to all business so we don't have to pay those costs anymore.

[piytar]

“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.”

It’s the same thing when you consider that the oil company had to buy or lease the land with the oil in it, thus paying for the oil in the ground just like another business pays for a piece of hardware. Both are costs of doing business. If a company doesn’t get to deduct its costs of doing business, of which the cost of the oil in the ground is a part for oil companies, they end up paying tax on gross revenues instead of profits. And that is just plain not viable.

[Puddleglum]

It’s the same thing when you consider that the oil company had to buy or lease the land with the oil in it, thus paying for the oil in the ground just like another business pays for a piece of hardware. Both are costs of doing business. If a company doesn’t get to deduct its costs of doing business, of which the cost of the oil in the ground is a part for oil companies, they end up paying tax on gross revenues instead of profits. And that is just plain not viable.

Thanks for the explanation

[antiRepublicrat]

If what you are saying is what they are talking about, then you make sense. I know this is all just part of the push to demonize the oil companies to cover for Obama’s failed energy policies.

[piytar]

To be clear on this part, TSgt: “because I’m not economically illiterate.” That was a reference to obastard, the dems who support this plan, and the useless idiot leftists in the population who are buying into the propaganda. Not you.

And I’m not sure about obastard. I think there’s a good chance he understands the economics quite well. And that’s why he’s pushing this!

[Brett66]

They will simply pass the cost on to consumers, this isn’t the way to fund government.

Also, the high price of oil is related to the dollar’s weakness, who’s fault is that?

[TSgt]

Thanks piytar for the clarification.

I was just playing devil’s advocate. Sometimes it helps me articulate a better conservative argument.

Again, thanks for your response.

TSgt

[Noob1999]

.....................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......................

The oil company has either rented the property above the oil, or paid huge lease fees to the government to attempt to find more oil under the seafloor, or on government owned property. Rather expensing these up front costs, they are allowed to claim them as capital investment, and write down over time.

The fisherman didn’t pay anything in advance to try to catch the fish, thus no capital investment.

[antiRepublicrat]

The fisherman didn’t pay anything in advance to try to catch the fish, thus no capital investment.

Given that government regulations restrict how many fish of certain types can be caught to prevent stock depletion, markets have sprung up where fishing rights can be bought and sold. But I don't know the tax implications for them.