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Down with Corporate Welfare! Big Oil Tax Loopholes Should Be Closed

By Jim Fink on March 9, 2012

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Earlier this week I took issue with President Obama’s March 1st speech on American energy policy because in it Barry erroneously asserted that U.S. energy independence requires costly government subsidies to develop uneconomic renewable energy technologies. In reality, unconventional horizontal drilling using hydraulic fracturing (“fracking”) has revolutionized both natural gas and crude oil production and promises to make the western hemisphere (for sure) and the U.S. (plausibly) energy independent by 2030.

The Real Energy Agenda of Liberals is Environmental, Not Energy Independence

Obama and the Democrats love to trot out “energy independence” when trying to convince the American public to spend money on renewable technologies because independence from foreign oil is a goal that virtually every American believes is important to our national security.  But what Obama and the Democrats don’t like to publicize is their real reason for supporting renewable energy: it’s “green” and protects the environment.  Personally, I consider myself an environmentalist to a limited degree and am willing to shell out a slightly higher portion of my heard-earned income to support clean water and air.

Subsidizing failing renewable energy companies, however, like Solyndra (solar panels) and Ener1 (electric batteries), is just throwing public money down a bottomless pit of wasteful despair. And shelving TransCanada’s (NYSE: TRP) Keystone XL oil pipeline – and forfeiting 118,000 American jobs (page 4) in the process – simply because small sections of the pipeline were positioned above the deeply-embedded Ogallala water aquifer in the Great Plains. The aquifer is so well-protected, in fact, that expert hydro-geologists – and Obama’s own State Department – concluded that the pipeline posed “minimal risk” to the environment.

Obama’s extremism on the environment at the expense of jobs has disappointed a substantial portion of the public. A December 2011 poll found that 78% of Americans believed the XL pipeline would create “a significant amount of jobs” and two-thirds support the project and disagree with the President’s political decision to kill it. Is it any wonder that 50% of all Americans consider Obama’s presidency a “failure?”

Tax Subsidies for Big Oil Companies are Wrong Too

Before you pass me off as nothing more than a Republican political hack, let me add that there was one part of President Obama’s energy speech that I completely agree with: the end of corporate welfare for big oil companies. Obama put it this way:

Right now, $4 billion of your tax dollars — $4 billion — subsidizes the oil industry every year. Now, these companies are making record profits right now — tens of billions of dollars a year.  Does anyone really think that Congress should give them another $4 billion this year?

It’s outrageous.  It’s inexcusable.  And I am asking Congress — eliminate this oil industry giveaway right away.  I want them to vote on this in the next few weeks.  Let’s put every single member of Congress on record:  You can stand with the oil companies, You can keep subsidizing a fossil fuel that’s been getting taxpayer dollars for a century, or you can stand up for the American people.

Many of these tax breaks (i.e., corporate welfare subsidies) started during the Warren Harding administration – more than 90 years ago – at a time when oil production was in its infancy and it was in the national interest to encourage development of a largely unexplored natural resource. There is absolutely no need for such tax breaks today, especially for the top-five largest oil companies known as “Big Oil.” Just look at the collective $137 billion in profits these five companies “made” (I refuse to use the word “earned” because they simply benefited from high oil prices) in 2011:

Company

2011 Profits

ExxonMobil (NYSE: XOM)

$41 billion

Royal Dutch Shell (NYSE: RDS-A)

$31 billion

Chevron (NYSE: CVX)

$27 billion

BP (NYSE: BP)

$26 billion

ConocoPhillips (NYSE: COP)

$12 billion

 

Big oil’s tax breaks consist of a four-way toxic cocktail of huge deductions: 

(1) domestic manufacturing tax deduction,

(2) “dual capacity taxpayer” rules that allow the claiming of foreign tax credits for royalties (i.e., not taxes) paid to foreign governments,

(3) “percentage depletion” deduction based on revenues instead of costs,

and

(4) immediate expense deduction (instead of capitalized amortization) for intangible drilling and development costs

Thanks to these deductions, ExxonMobil’s effective tax rate over the past three years has been only 17.6% — three percentage points below the effective tax rate paid by the average American. Common decency tells you that’s just not right.

In May 2011, Senate bill 940 entitled the Close Big Oil Tax Loopholes Act was introduced and it would have required big oil companies to pay taxes like the rest of us. ConocoPhillips CEO Jim Mulva had the audacity in a press release to accuse Senate proponents of the bill as “un-American.”  What a disgrace! Requiring that oil companies pay their fair share of taxes would not result in any of the parade of horribles Mulva outlined in the press release:

  • cost jobs
  • raise consumer prices
  • shrink government revenue
  • hamper the ability to remain competitive and reinvest in energy technologies and resources in the United States and internationally.

The only thing eliminating tax subsidies would do is reduce the U.S. budget deficit, as well as put a halt to the exorbitant compensation packages paid to oil executives. Back in 2005, Mulva testified before the U.S. Congress that ConocoPhillips did not need tax incentives to drill for oil when oil was trading for $55 per barrel. Yet in 2011 with oil trading at $100 per barrel, Mulva said before Congress that such incentives were needed!

Granted, some of these tax subsidies are available to companies in many different industries, so to withdraw them only from big oil companies could arguably be a violation of the U.S. Constitution’s Fifth Amendment due process clause. But federal regulations often provide a helping hand to companies in fledgling industries, so I don’t think this equal protection argument holds water.

In any event, Senate Bill 940 never became law because a vote to invoke cloture, which would have stopped a Republican filibuster, failed to garner the necessary 60 votes. The vote was 52-48 in favor of cloture. Interestingly, those Senators voting against cloture (mostly Republicans) received five times as much campaign contribution money from the oil industry as did the Senators voting in favor (mostly Democrats). Coincidence? I think not. It’s sad that our political leaders can no longer be trusted to do the right thing, having been completely corrupted by corporate campaign contributions.

Democrats and Republicans are Both Guilty of Corporate Welfare

A pox on both political parties! Democrats are wrong to subsidize unprofitable renewable energy for job-killing environmental reasons and Republicans are wrong to subsidize immensely profitable big oil companies for, well, no reason at all other than oil companies have paid them off with campaign contributions.

In these difficult economic times, let’s take back our hard-earned dollars from the Washington power elite and stop all of this corporate welfare now!

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  1. avatar
    texshelters Reply July 29, 2012 at 4:25 PM EST

    Why all the insults? It’s President Obama, not “Barry”.

    If you have a good argument to make, disrespecting the office of the presidency is unnecessary. And no, I won’t vote for him in November.

    PTxS

  2. avatar
    Richard McClellan Reply March 27, 2012 at 12:43 AM EST

    Here is a list of the Oil companies’ Tax Breaks:

    * Domestic Manufacturing Deduction (IRS Tax Code Section 199 – Domestic Manufacturing Activity Credit) – This deduction alone is expected to save the oil and gas industry $18.2 billion over the next ten years.

    * Intangible costs (Tariff Act of 1913) – The break is worth $12.5 billion over the next ten years.

    * 1926 rule (Revenue Act of 1926) – This depreciation rule can be a boon: The total of the deductions over the life of the well can sometimes exceed what the company actually spent on the well. This tax break allows drillers to deduct 15 percent of the well’s revenue from its taxable income per year.

    * Royalties (Claiming Foreign Royalties (non-deductible) as Foreign Taxes (deductible))

  3. avatar
    Barry Gleicher Reply March 10, 2012 at 7:37 PM EST

    I disagree with your article regarding taxation of energy companys. Companys that drill need to DEFER taxation by drilling in new areas. The allowance to expense drilling costs on a current basis only defers taxation until energy; oil, natural gas production exceeds the cost of the expense deduciton. Furthermore, there are alternative minimum taxes on items of tax preference such as certain drilling expenses and depletion allowances. Therefore, corporate taxes are not entirely escaped on a current basis.. With regard to your suggention on foreign royalties; foreign royalties earned by US Companys result in taxes paid to the foreign country with a resulting credit on the US tax return. That is the case in every industry. Increasing energy production in the world is a good objective and international companys should be treated with regard to foreign tax credits no differently than anyother industry.

    In addition, the ideas presented could be applied to MLPs where taxes are deferred and not paid on a current basis by the unit holder. Those seeking ends to “corporate welfare” frequently go after MLPs where they want to apply corporate tax rates. That would be a disaster. MLPs such as Enterprise, Kinder Morgan and Williams etc. have created much of our countries pipelines. Investors have been rewarded in the process. In conclusion, I would support the energy industry which is made up of many small investorts who have earned good returns on capital and at the same time have contributed to where we are today in terms of oil and gas production; and transsmission through pipelines.

  4. avatar
    David Talbott Reply March 10, 2012 at 5:12 PM EST

    The subsidy for oil is based on the philosophy that once a well is drilled and producing it will eventually stop. It’s the “declining” value that is supposedly subsidized.
    Strange that I never hear complaints about the billions in agriculture subsidies that far exceed those for oil.

  5. avatar
    Willie J. Kingston Reply March 10, 2012 at 12:56 PM EST

    I think it is time to set time limits on congress.See Warren Buffett’s interview on CNBC, July 7, 2011. #(1) above (Domestic Manufacturing Tax Deductions) is the only one that should be eliminated. All other loans, deductions or other incentives to effect the outcome of of any business should be eliminated, such as paying someone to grow or NOT to grow tobaccco, beans, corn or any other crop. Such as loans to certain businesses. #(2) Foreign taxes should NOT be eliminated as it is a cost of business. The same as railroads that extend into Mexico, fast foods with outlets in China or pharmacy that sells to Tibet.#(3) is more of an expense than depreciation on rental property.

  6. avatar
    Ira Cotton Reply March 10, 2012 at 12:20 PM EST

    You list 3 deductions you believe should be eliminated:
    – domestic manufacturing tax deduction
    – deduction for taxes (royalties?) paid to foreign governments
    – deduction for intangible drilling and development costs

    Of these, I believe the first 2 are available to all types of companies, so I don’t agree that oil companies should be singled out. As for the deduction for intangible drilling and development costs, why shouldn’t expenses be deducted from income to calculate net profit, which is then taxed. I could be persuaded that such expenses should be ammortized over the life of a well, but that is not what you advocate.

    I find it distasteful that you have jumped on the leftist bandwagon to criticize oil companies for their successes. Oil exploration is a risky business and commodity prices can swing widely, even over just a few years. I don’t agree with your characterication of these deductions as corporate welfare any more than I agree with demands for persons with high income to “pay their fair share,” since they already are and more.

    For me, this article calls into question your basic judgement and makes me less likely to read anything you write or take any advide you offer.

  7. avatar
    Joseph Darrow Reply March 10, 2012 at 12:02 PM EST

    Great article. I agree that both major political parties corrupted by corporate campaign contributions. Unfortunately, since we seem locked into a two-party system, I don’t see much hope. To add to this problem, political awareness in the USA is way below par.

    Sincerely,

    Joseph Darrow

  8. Jim Fink
    Jim Fink Reply March 10, 2012 at 8:51 AM EST

    The article below outlines the various big oil subsidies, most of which are specific to the oil industry:

    http://www.americanprogress.org/issues/2011/05/big_oil_tax_breaks.html

  9. avatar
    Carl Fiebich Reply March 10, 2012 at 8:43 AM EST

    Please be specific and identify the so called tax subsidies for the oil industry. What deductions are available to the industry that are not available to all businesses?

  10. avatar
    Charles Payne Reply March 10, 2012 at 8:21 AM EST

    As a retiree from the petroleum industry, over 40 years working in various aspects of the business, mostly marketing I would agree that these tax incentives should be removed, however while we are at it lets remove all of the tax incentives from everything and let the market motivate all business. You talk about Exxon’s effective tax rate, how does it compare to GE’s? This is my only point. If its good for the contry to do it to the oil companies than it should be good to do it to all industries.

  11. avatar
    Steve Reply March 9, 2012 at 7:24 PM EST

    Speaking for myself, I’m interested in your tempered investing advice, which I find thoughtful and useful. If your political views play into some general or specific investment thesis please explain what it is. I understand you are unhappy with Obama (“Barry”?), with politicians, with oil companies, with obscene profits (at least if “made” by oil companies), but just don’t see the relevance of your views in this context.

  12. avatar
    Weldon Gebhard Reply March 9, 2012 at 4:18 PM EST

    Would taxing Big Oil or any other sector really make a dent in the Deficit.

  13. avatar
    Dave Reply March 9, 2012 at 3:21 PM EST

    If you want to talk obscenely-high profits, what about Apple? Do we need a high-tech windfall profits tax too since smart phones are pretty much a necessity as I see it? Having said that, I do agree that we need to fix the corporate tax code across the board by lowering the rates and getting rid of deductions. Let the free market determine the winners and losers.

  14. Jim Fink
    Jim Fink Reply March 9, 2012 at 2:22 PM EST

    Oil is a commodity and its price is set by the global marketplace of supply and demand. Oil companies do not have control over the oil price and cannot pass on higher costs — they simply benefit from the windfall of higher oil prices.

    Removing these unjustified tax breaks will reduce their obscenely-high oil profits and have no effect on the oil price.

  15. avatar
    Paul D. Hill Reply March 9, 2012 at 1:46 PM EST

    If oil companies are subject to fees or royalties to foreign governments to get oil from those countries, if they can not deduct that cost it will increase the price of the oil. I think oil prices are high enough now!