Let’s all say the words at the same time … business expenses. You know – expenses – the fixed and variable costs that companies incur as they spend money in an effort to put people to work and make a profit. Politicians are now in the habit of referring to “big oil subsidies” that are really business expenses. Liars…
I’ve been trying to find the time during the last couple of weeks to write about this subject, since I knew the federal government was not handing out cash to “big oil” in the form of corporate welfare. It’s just not the case, and if someone can find a federal program that actually takes money from individual taxpayers and writes a check to big oil to “subsidize” their business, please feel free to link to it in the comments section.
Let me be clear. Politicians and government bureaucrats who use phrases such as corporate welfare and energy subsidies do not think the money belongs to you, it belongs to them and they will decide how it should be handed out. Think about it. They told us they could not afford to give those of you who have a Health Savings Account a “tax break” on over-the-counter medication.
Tax break? That clearly pushes their agenda … the money does not belong to you … it belongs to the government first.
Hat tip to Jazz Shaw over at Hot Air and the American Petroleum Institute for doing the heavy lifting and getting me to finally write about this subject.
When President Obama pressures Congress and others to end oil company “taxpayer” subsides, he’s really suggesting limiting what those companies can write off as an expense. It’s as simple as that. This concept would be akin to telling a pharmaceutical company the expense write off they have for the research and development of a cure for cancer is a “taxpayer-paid” subsidy that should be taken away if your profits are deemed “unreasonable.”
Do you see how wrong that is? What would happen if a pharmaceutical company was not allowed to write off a portion – or all – their research and development efforts? What would happen to the cost of medications and cures?
Here is the PDF from the American Petroleum Institute. I’m guessing they won’t mind if I reproduce their entire two page white paper right here. My emphasis in bold.
Why Oil & Gas Tax Treatments Are Not Unique or “Subsidies”
Contrary to what some in politics and the media have said, the oil and natural gas industry currently enjoys no unique tax credits or deductions. Since its inception, the US tax code has allowed corporate tax payers the ability to recover costs and to be taxed only on net income. These cost recovery mechanisms, also known in policy circles as “tax expenditures”, should in no way be confused with “subsidies”, i.e., direct government spending.
Intangible Drilling Costs (IDCs)
- The IDC deduction is a mechanism that allows for the accelerated deduction of drilling costs, such as labor costs, associated with exploration activities (approx 60-80% of the cost of the well).
- Exploration and production companies can claim a deduction equal to 100% of these costs in the year spent. Integrated companies – “Big Oil” – can only deduct 70% with the remainder recovered over 5 years.
- This is a deduction, not a credit or government spending outlay and is no different than the policy behind and treatment of R&D costs vis-à-vis the R&D deduction available for other industries.
Foreign Tax Credit – Dual Capacity Rules
- The dual capacity regulations are not and never have been considered a tax expenditure or “subsidy” by the government.
- They represent additional rules placed on oil and gas companies to prove that the credit used to offset payments to foreign countries are indeed income tax payments and nothing else.
- Repeal of the rules generates revenue solely because it would impose double taxation on US based companies.
Domestic Manufacturer’s Deduction – Section 199
- A deduction (not a credit) equal to 9% of income earned from manufacturing, producing, growing or extracting in the United States, is available to every single taxpayer who qualifies in the U.S.
- The oil and gas industry, and only the oil and gas industry, is limited to a 6% deduction.
- The percentage depletion deduction is a cost recovery method that allows taxpayers to recover their lease investment in a mineral interest through a percentage of gross income from a well.
- This depletion method is not available to companies that produce oil as well as refine and market it – “Big Oil”.
- This is available to all extractive industries (gold, iron, clay, etc) in the US and is in no way unique to the oil and gas industry.
- Taxpayers that hold an inventory are required by law to track inventory costs – it is simply an accounting method and nothing else.
- Repealing LIFO deems a sale of inventory to occur and generating a significant tax gain. Therefore there is an assumed tax bill without any corresponding cash gain being generated.
Expensing of Tertiary Injectants
- Tertiary injectants refers to items injected into older reservoirs to help continue production.
- The cost of the injectants are expensed similar to materials and supplies because they are generally used up in the production process.
- Without this provision, it is unclear how such operating costs would be recovered. This could easily increase the costs of operating these older fields.
Geological and Geophysical Costs
- G&G costs are the expenses associated with exploring for oil and gas.
- Currently, independent producers are allowed to recover domestic G&G costs over two years, and the proposal would increase that period to seven.
- “Big Oil” is not impacted, as the largest integrated oil companies already recover the costs over 7 years.
EOR and Marginal Well Credits
- These tax credits are designed to support continued domestic oil production when oil prices are so low that it may otherwise be un-economical. The credit phase out when the price of oil is above a certain amount
- These credits have not been applicable for taxpayers in the oil and gas industry for years, and in order to be even the least bit useful, the price of a barrel of oil must be at $42 (EOR credit) or $27 (marginal well).
As you read through the above, you’ll find that in a few instances “big oil” is actually penalized already for being “big oil.” They are not treated equally when it comes to other industries. How is that in any way fair? How does that keep the cost of energy as low as possible?
How does Obama’s desire to eliminate “subsidies” for “big oil” keep the cost of energy low? Oh yeah, never mind … he’s totally cool with energy prices “necessarily” skyrocketing.
If you prefer to be serious about the situation, let’s put some effort forward to simplify the tax code.
What say you? Comments welcome below.
Note: I’ve realized our team here at RVO has used the term “subsidy” in the past when it comes to other subjects including ethanol, and personally I’ll commit to using the word more carefully in the future. That said, at some point a business expense really does become a taxpayer-funded subsidy, who can tell me when that is?