Discussing oil taxation

May 9, 2011
A political body that can't discuss energy intelligently or honestly can't produce energy policy that is sensible and just.

A political body that can't discuss energy intelligently or honestly can't produce energy policy that is sensible and just. Recent talk in Washington, DC, about ending oil and gas tax incentives shows why energy policy in the US is such a mess.

"When oil companies are making huge profits and you're struggling at the pump, and we're scouring the federal budget for spending we can afford to do without, these [oil and gas] tax giveaways aren't right. They aren't smart. And we need to end them," President Barack Obama said in his weekly address on Apr. 30. "That's why, earlier this week, I renewed my call to Congress to stop subsidizing the oil and gas industries." From such nonsense no reasonable policy can flow.

Twisted logic

Obama's logic is twisted. Yes, oil producers are reporting large profits. Yes, gasoline prices are high. Both phenomena occur when crude oil prices zoom, as they have this year. But neither is a reason to punish oil and gas companies. Would the president lower oil-industry tax rates when crude oil prices fall and producers' profits plummet?

Furthermore, tax measures Obama wants to repeal are not "giveaways," and the US does not, except in minor ways, subsidize oil and gas. To protect US oil and gas companies from having to pay tax twice on income earned abroad is not to subsidize them. To let producers charge to expense money spent on drilling materials and services that have no salvage value is not to give them anything. To deny US oil and gas companies the use of a deduction available to companies in other industries would be to isolate them for punitive taxation, not to end unaffordable federal spending.

The US subsidizes small amounts of oil and gas production through what remains of the percentage depletion allowance. Subsidization occurs when total depletion charges exceed all capitalized costs of a producing property. This can happen with a depletion rate fixed by statute. But it's probably rare. Only small independent producers can use percentage depletion, and their use is restricted.

Technicalities such as these are confusing. The complexity makes oil and gas taxation easy to bungle and even easier to exploit for political gain.

House Speaker John Boehner (R-Ohio) bungled on Apr. 25 when he cozied up to Obama's raid on oil and gas economics by saying, according to a New York Times report, he didn't believe "the big oil companies need to have the oil depletion allowances." Did he mean percentage depletion? If so, he's late. Big oil companies haven't been able to use percentage depletion for years. If Boehner meant they shouldn't be able to use cost depletion, the only other way to write down natural resources diminished by production, then he has voiced support for the taxation of investment. That proposition should please no one worried about the US economy.

Obama 'heartened'

Boehner's blooper cracked a door into which Obama jammed his foot. "I was heartened that Speaker Boehner yesterday expressed openness to eliminating these tax subsidies for the oil and gas industry," the president wrote in a letter to leaders of both Houses of Congress. Confusion thus bred exploitation. Within days, Sen. Finance Committee Chairman Max Baucus (D-Mont.) was discussing plans for a bill to, among other things, deny use of the manufacturers' tax deduction to the five largest oil and gas companies and impose an excise tax on selected leases in the Gulf of Mexico. He would use proceeds to subsidize "clean energy" and fuel-efficient vehicles.

"Now is not the time to stand idly by while large oil and gas companies get billions of dollars in tax breaks," Baucus said. "Now is the time to take concrete steps toward cleaner, more-affordable, domestically produced energy."

Wrong. Now is the time for politicians to quit leveraging costly energy fantasies against confusion over subsidies and giveaways that exist only in ill-informed and—too frequently—deliberately misleading rhetoric.

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