When politicians and interest groups joust with "corporate welfare," oil and gas producers should snap to attention. In the wrong hands, some of the producing industry's business peculiarities can be made to look suspicious.
The touchy area is depletion accounting. Within that murky realm lurks an especially troublesome phrase: "depletion allowance."
The words imply that companies are getting away with something questionable when they reduce taxable income for depletion. To some minds, this constitutes corporate welfare.
The allowance
When percentage depletion was in general use, with expense rates set by statute as a percentage of gross income, the term "allowance" was perhaps appropriate. Now, however, only independent producers may use percentage depletion, subject to limits.
The alternative, cost depletion, nevertheless carries the "allowance" tag, too. It thus tends to fall into jeopardy during crusades against corporate welfare, even though depletion is to mineral resources what depreciation is to physical assets. Depreciation seldom draws scornful attention. Nor should it. Depreciation accounts for the shrinkage of asset values that results from economic use. Depletion accomplishes the same thing for mineral resources extracted and sold. Businesses not "allowed" to reduce income by amounts representing depreciation, depletion, or-for intangible assets-amortization would pay taxes on nothing.
It is a credit to the latest corporate-welfare crusaders, therefore, that depletion escaped attack. Or did it just escape notice? The Stop Corporate Welfare Coalition, led by the budget committee of the U.S. House, last week recommended elimination of 12 federal provisions that it identified as corporate welfare. Whatever the reason, depletion accounting wasn't among them.
An interesting item that did make the list was spending on fossil energy research by the Department of Energy. The research has helped a number of companies over the years and added to knowledge and know-how. Recently, it has helped preserve mature U.S. reserves while technologies emerge to sustain and improve recovery rates.
It is reasonable to ask, however, whether the work would be more appropriately performed by private industry. In fact, asking the question across the broad span of government activities is essential. The questions deserve honest answers.
The honest answer here is that private industry is the more appropriate venue for most fossil energy research, certainly research aimed at immediate development of practical technology. Entities that use and profit from such technology, not taxpayers, should develop and pay for it.
The same can be said for research into nonfossil energy. Yet the government's programs in this area didn't make the coalition's hit list. When the energy market needs renewable fuels, private enterprise will respond to economic incentives and provide both the fuels and the needed technology. But the market does not need exotic fuels in significant quantities now. Taxpayer dollars spent developing such fuels only sustain an industry on a scale far out of proportion to its foreseeable business prospects. This is corporate welfare, although saying so is not the popular thing to do.
What's welfare?
So the oil and gas industry shouldn't take too much comfort in a shot not fired at its financial base. The coalition's list targeted spending programs, not accounting methods. And its favor of one industry over another for federal research money casts doubt on its purposes. It's worth wondering how readily the coalition would accept the grain industry's ridiculous claim that a rich tax credit for fuel ethanol differs little from depletion accounting and thus is no greater a form of corporate welfare.
Critical distinctions might become clearer if crusaders quit cooing about corporate welfare and started snarling at real boondoggles.
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
