Misrepresentation of tax mechanisms unique to the oil and gas industry occurs not just in the US. Politicians in Canada, too, have deployed the "subsidy" smear—and elicited an instructive response.
In the US, the tactic has become political boilerplate. President Barack Obama went out of his way last month to assert that tax preferences he wants to jettison are special favors. "Before we stop funding clean energy research, let's ask oil companies and corporate jet owners to give up the tax breaks that other companies don't get," he said July 22 at the University of Maryland. "I mean, these are special tax breaks."
Special breaks?
Technically, the president is correct. Companies outside the oil and gas industry don't have deductions for intangible drilling costs, for example. But those companies don't have intangible drilling costs, so why would they? Other industries can deduct normal business expenses; IDC expensing simply adapts the deductibility of business expenses to oil and gas drilling. The mechanism and other industry tax preferences under threat are not special tax breaks, and Obama shouldn't suggest otherwise. Cutting IDC expensing and other industry tax preferences would amount to raising taxes. The increased cost would discourage work in the oil and gas industry. The damage would propagate through the economy.
Adaptation of tax law to industry peculiarities isn't the same as subsidization, as Obama and other Democrats recklessly assert, confident that most Americans won't recognize the deception. So mechanisms that apply specifically to oil and gas—plus some, such as the manufacturers' tax deduction, available to all industries—are under siege. And an industry that performs important work and directly or indirectly employs 9 million Americans faces a discriminatory tax increase at a time of economic peril. Incredible.
Confusion over this issue created an East-West stir in Canada last month when Ontario Premier Dalton McGuinty implied at a government meeting in Vancouver that his province was subsidizing oil and gas activity in the Canadian West. He spoke of "preferential tax treatment for people who want to develop oil and gas projects" in contrast to similar favors for "people who want to develop clean-energy industries in Ontario." McGuinty's Green Energy Act, which provides premiums to producers of renewable energy and has driven up electricity prices, is under assault from opposition conservatives. And Ontario's manufacturing economy is struggling. The province has become a net recipient of "equalization payments" under an economic balancing program of the federal government.
McGuinty's squawking about oil and gas subsidies rankled analysts in resource-rich Alberta, a net equalization payer. "The oil and gas industry isn't being subsidized by Ontario or any other taxpayers for that matter," wrote Licia Corbella, a columnist and editorial page editor of the Calgary Herald. She said Derek Fildebrandt, until recently acting director of the Canadian Taxpayers Federation, told her a search by his group for oil and gas subsidies turned up nothing.
"We looked and we looked and discovered that these often-cited subsidies to the oil and gas industry simply weren't there," Fildebrandt said in a July 22 column by Corbella. "There were some tax-deferral mechanisms with regard to capital costs on multibillion-dollar plants, but the federal government closed those loopholes so there is nothing now at all." Fildebrandt also said McGuinty's program of support for renewable energy "is bankrupting Ontario and its businesses."
Easy fodder
The idea that large, profitable companies in a widely distrusted industry escape taxation at public expense is abhorrent. It thus makes easy fodder for populist opportunism. But the idea conflicts with reality. In the US, effective tax rates paid by large oil companies, the usual political targets, are in fact high in comparison with big companies in other industries.
Obama needs cash to fund the Keynesian futility with which he has doomed fiscal policy. McGuinty needs someone to blame for costly mistake with renewable energy. So both leaders stoke popular misunderstanding with repetitious falsehood. Eventually, voters will see the ruse.
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