The view from Iowa

Here's what they say in Iowa about the oil and gas business: "...Big Oil has bamboozled, chicaned, fleeced, bilked, chiseled, duped, shafted, tricked, plundered, fooled, hustled and hoodwinked us over the decades to an extent that would shame even the most breathless advocate of ethanol." So writes George Anthan in the June 17 edition of the Des Moines Register. Don't blame Anthan. The raw material for his silliness comes from Iowa lawmakers in high dudgeon this month over a proposal by

June 30, 1997

4 min read

Here's what they say in Iowa about the oil and gas business:

"...Big Oil has bamboozled, chicaned, fleeced, bilked, chiseled, duped, shafted, tricked, plundered, fooled, hustled and hoodwinked us over the decades to an extent that would shame even the most breathless advocate of ethanol." So writes George Anthan in the June 17 edition of the Des Moines Register.

Don't blame Anthan. The raw material for his silliness comes from Iowa lawmakers in high dudgeon this month over a proposal by Rep. Bill Archer (R-Tex.) to end tax credits for fuel ethanol.

Running on empty

"...When it comes to the facts," said Sen. Tom Harkin (D-Iowa) in a June 11 press conference with other ethanol supporters in the Senate, "the record shows Big Oil is running on empty." Cute, these Iowans.

Harkin cited a Congressional Research Service finding that from 1979 to 1995 "just two of the oil industry's tax breaks-percentage depletion and expensing of intangible drilling costs-cost taxpayers nearly $34 billion." The amount, he said, is nearly five times the tax revenue lost to the 54¢/gal federal tax credit for ethanol used in vehicle fuel.

"Ethanol has the facts on its side," Harkin declared after running through the usual list of exaggerations about ethanol's benefits to consumers, the environment, the economy, and energy security. "Big Oil may think it has a tiger in its tank, but in picking a fight over ethanol it really has a tiger by the tail." The cute never rest.

They also don't know what they're talking about.

It is shriekingly ridiculous to compare the oil industry "tax breaks" cited by Harkin to ethanol's excise exemption. The ethanol credit is a direct tax subsidy, without which ethanol could not compete as a fuel additive.

Percentage depletion is an accounting tool that keeps extractive industries from paying taxes on capital. Depletion is to mineral reserves what depreciation is to physical assets. It is no more a subsidy than is the depreciation expense on a farm tractor.

Tax law allows only independent oil and gas producers and royalty owners to claim percentage depletion, subject to limits. Producers who can't take percentage depletion must resort to cost depletion, which doesn't fully recover exploration and development capital for tax purposes. The integrated producers that Harkin and his newspaper friends disparage as Big Oil haven't been able to claim percentage depletion since 1975, when Congress repealed it after long controversies over the rate. In most mining industries, percentage depletion is standard accounting procedure.

The other oil and gas "tax break," IDC expensing, doesn't lower tax liabilities at all. It affects timing, not totals. It allows a producer to write off outlays for certain immediately consumed goods and services in the year of expenditure. The alternative is to group the costs in a capital account and write off portions each year to expense. The ultimate tax liability for any given property is the same either way. IDCs expensed now can't be deducted later. Annual IDC expense totals, therefore, do not represent taxes ultimately avoided and thus bear no relation to the ethanol give-away.

Bad comparison

It makes little sense to compare tax treatment of a manufactured product to that of raw materials. If friends of ethanol keep pressing the issue, oil and gas producers should raise the more relevant point of agricultural price supports, off which the U.S. only recently began to wean its farmers. Ethanol apologists who won't see the connection should be careful where they use words like "bamboozled" and "hoodwinked."

Last week, ethanol won a round. The Senate Finance Committee voted to extend but gradually lower the ethanol subsidy. Archer compromised but vowed to keep fighting. The oil industry should prepare for more hackneyed insults from the tiger it supposedly holds by the tail, which is beginning to act like a weasel caught in a chicken coop.