A lingering threat of discriminatory taxation became a full populist assault against the US oil and gas industry last week. Pressure is intense in Washington, DC, to act on federal spending and revenue. The Department of Treasury says Congress must increase the federal debt ceiling by Aug. 2 to keep the nation from defaulting on some obligations. Lawmakers worried about deficit spending won't support the adjustment unless it's accompanied by spending cuts. Others want to raise revenue—by which they mean tax rates. Now, to the eternal peril of the oil and gas industry, President Barack Obama has entered the fray.
In a June 29 press conference, Obama said: "If we choose to keep tax breaks for millionaires and billionaires, if we choose to keep a tax break for corporate jet owners, if we choose to keep tax breaks for oil and gas companies that are making hundreds of millions of dollars, then that means we've got to cut some kids off from getting a college scholarship, that means we've got to stop funding certain grants for medical research, that means that food safety may be compromised, that means that Medicare has to bear a greater part of the burden."
Well, no.
Revenue vs. taxation
Obama has frilled with sentiment an error common in fiscal politics: calibrating revenue to taxation. A tax dollar not paid by a productive person or organization does not necessarily represent a dollar denied some government program. Lowering tax rates under the right conditions can, in fact, raise federal revenue by stimulating investment and activity. Governmental spending, carefully targeted, can energize the economy, too. The challenge of the moment isn't to choose between spending and taxation. It's to balance federal behavior against reasonable expectations for revenue. By specifying popular programs alleged to be in jeopardy, the president elevated static analysis, which is always misleading, to a new level of silliness.
He aggravated the deception by implying oil and gas companies enjoy special treatment. "Before we ask our seniors to pay more for health care, before we cut our children's education, before we sacrifice our commitment to the research and innovation that will help create more jobs in the economy," he said, "I think it's only fair to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys."
For an oil company, what "tax break" would that be? Yes, tax law has provisions, such as expensing of intangible drilling costs and accelerated write-down of geological and geophysical costs, that accommodate industry peculiarities. These aren't special breaks. All companies can write off normal expenses in calculations of income subject to taxation. Statutory features unique to the industry deal mainly with timing. Other high-dollar provisions targeted by Obama, such as the manufacturer's deduction and foreign tax credit, are available to other industries.
More tax
Obama thus isn't asking "an oil company" to "give up that tax break that no other business enjoys." He's asking it to pay more tax. Yet effective tax rates on US oil companies already exceed those on companies in other industries. Citing a January 2011 report by Bloomberg Businessweek of findings in a University of North Carolina study, the American Petroleum Institute says average effective tax rates on large US oil companies exceeded the federal statutory rate of 35% during 2005-09. Chevron's effective rate for the period was 43.9% and ExxonMobil's, 41.7%. Except for retail, effective rates on large companies in other major industries, including technology, financial services, industrial and heavy machinery, and pharmaceuticals, fell below the statutory rate.
There would be nothing "fair" about raising taxes on an industry already heavily taxed, even a large and—for now—very profitable one. And there's much wrong about building a case for doing so on falsehood.
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