Loopholes and subsidies

Last week's pause in the federal budget war gives U.S. oil and gas companies a chance to look beyond the broad negotiating points that receive most attention. Among the smaller, more obscure issues are reasons for the industry to be concerned.

Of course, any budget fight is a reason for oil companies and their employees to worry. Some politician always wants to "raise revenues" from, which means hike taxes on, oil companies in the interest of "fiscal responsibility," not to mention populist politics.

Closing loopholes

For the moment, that politician is Sen. Thomas Daschle (D-S.D.)-with the deeply regrettable but unshocking concurrence of President Bill Clinton.

Daschle drafted a budget that would "close corporate loopholes" at the same time that it excluded farm subsidies from cuts. Loopholes by Daschle's definition include U.S. tax credits for foreign tax payments by U.S. oil and gas companies and exemptions from income taxation on the first $70,000/ person that U.S. citizens earn working abroad.

Daschle would close the foreign tax payment "loophole" by simply declaring that all foreign taxes are royalties, which are not creditable against U.S. taxes. Savings to the federal government during 7 years, by Daschle's estimate: $15.8 billion. And he would close the personal earned-income exemption by eliminating it. Estimated 7 year savings: $9.6 billion.

Daschle makes it look so easy. All these savings, and the farmers who vote for him get to keep their subsidies!

And here's a surprise: South Dakota is not the official domicile of many international oil and gas companies. The state probably doesn't have many residents working abroad for companies of any type. So a senator from a state like South Dakota alienates few voters when he overlooks technicalities important elsewhere.

One such technicality is that companies ought not be taxed twice on the money they make. That's why U.S. companies are allowed to take credits against U.S. taxes for nonroyalty taxes they pay on foreign income.

Concerning the tax credit on foreign income, tax laws and the Internal Revenue Service happen to be quite picky-some oil company accountants would say too picky. In an age of production sharing arrangements, certain types of payments to host-country governments do resemble royalty payments. Congress and the IRS have been careful-some accountants might say overly eager-to make sure that oil companies deduct, rather that claim credits for, payments that amount to royalties by another name.

This vigilance has made oil companies careful about defining the payments they oblige themselves to make to foreign governments. It has made foreign governments careful about specifying what taxes are what in their treaties with the U.S.

Daschle would scuttle such nit-picking, call it all royalty payment, and make $16 billion for the Treasury. And for $10 billion more he'd tell U.S. citizens working abroad that they're on their own as far as tax law is concerned. Better that they stay home on the farm-which, if farm subsidies do remain intact, might be the economic choice, after all.

Intentional slap?

It's one thing for a farm state politico to propound this kind of stuff. It's quite another for the U.S. President to embrace it as national policy. How does Clinton intend to reconcile it with his erstwhile championing of international trade and purported concern for competitiveness abroad of U.S. companies? Or is the slap intentional, like the oil-heavy BTU tax proposal early in Clinton's term?

The consolation is that it's all just this week's mischief in a budget contest that does, in fact, represent an historic clash of ideologies. Daschle's nonsense probably will get traded away, forgotten, or-best of all-consciously dismissed for lack of merit. But the threat provides a useful reminder that when politicians discuss federal revenues, oil companies cannot afford to rest.