Last week, Congress hauled the chief executives from America's biggest oil companies into a committee hearing where they were hectored about the billions in tax breaks their industry receives to produce crude. As Bloomberg reported:
Exxon Mobil Corp. Chief Executive Officer Rex W. Tillerson and four counterparts defended $21 billion in U.S. tax breaks that Democrats are seeking to recapture to reduce the federal deficit.
OK. But there is another energy subsidy that could be eliminated that would help reduce the budget deficit even more. The bioethanol subsidy.
As I noted last fall, the National Academy of Sciences' policy journal, Issues in Science and Technology, had just published a remarkably disturbing commentary, "The Dismal State of Biofuels Policy," [subscription required] about how much Americans taxpayers are likely to pay in the future for the privilege of burning food in their gas tanks. The commentary, citing estimates from the subsidy-tracking nonprofit Earth Track, is by University of Minnesota economist, C. Ford Runge and Cargill Foundation* president Robbin Johnson. From the article:
According to estimates by Earth Track founder, Douglas Koplow, if current laws are maintained until 2022, the biofuels industry will receive more than $60 billion per year in subsidies, more than six times the $9.5 billion in support received in 2008. Cumulative subsidies between 2018 and 2022 are expected to total $420 billion. If the Obama plan to require 60 billion gallons by 2030 comes to pass, subsidies in that year would be $125 billion, and cumulative support from 2008 to 2030 would be in excess of $1 trillion.
So, $21 billion from the oil industry versus $60 billion from the ethanol industry, and perhaps considerably more if the ethanol mandates hold.
Cato Insitute energy policy analysts Jerry Taylor and Peter Van Doren explain that Congressionl fiddling with the tax code introduces inefficiency in economic decisionmaking by companies and investors. They conclude:
Even left-of-center energy activists like Amory Lovins of the Rocky Mountain Institute, Carl Pope, executive chairman of the Sierra Club, and green energy investor Jeffrey Leonard, chairman of the Global Environment Fund, think the time is ripe to eliminate all energy subsidies in the tax code and let the best fuel win.
Let the best fuel win. On Capitol Hill that sentiment qualifies as crazy talk.
*For those few H&R commenters who reflexively indulge in simplistic follow-the-money "analyses" of viewpoints in place of actually exercising their critical faculties (and we all know who you are), please note that Cargill is the third-largest producer of ethanol in the U.S.
Disclosure: I am still holding onto my 100 shares of Exxon Mobil in my retirement account.
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Let's get rid of both.
I second the motion. This might be something people across the political spectrum could agree on. Or am I being far too optimistic?
My understanding is that the so-called oil subsidies are actually deductions for depreciation, the kind of deduction that any extraction industry gets.
If that's the case, then I'm not sure calling them subsidies is accurate, although I could be convinced. I'm quite sure calling them oil industry subsidies is inaccurate, because they aren't given just to oil. But I'm no tax expert, so some actual, you know, facts would be nice to have.
I believe ethanol, though, is a different kettle of fish. It gets a nice fat piece of rent-seeking in the form of fuel mandates, and I believe it gets additional subsidies in the classic sense.
So I'm not sure that "a pox on both their checkbooks" is necessarily the way to go here.
"My understanding is that the so-called oil subsidies are actually deductions for depreciation, the kind of deduction that any extraction industry gets."
If this is true I might agree with you. But it does highlight a need to radically change the tax code. BTW If I had to choose between a low flat tax and the so called "fair tax" I would go with the flat tax in a heart beat. The Fair Tax could easily wind up being a sales tax in addition to an income tax. I know that is not the intention of fair tax proponents but I also know that few government programs have been restrained to their original purpose.
If this is true I might agree with you.
So exactly what are these "tax breaks" that oil gets?
??? You were the one who was bringing up the issue?????
You imply that my understanding is wrong. I honestly don't know, which is why said some facts would be nice.
Apparently about $4 billion of the "subsidies" are subsidies, and the other 17 or so are "extraordinary" tax deductions, which are not really extraordinary if you beleive that depletion is a legitimately deductible expense.
---"If this is true I might agree with you"---
---"If this is WERE I might agree with you."---
It sounds like he was trying to figure out if it was true, not questioniong you.
"It sounds like he was trying to figure out if it was true, not questioniong you."
Disintrested bystander is correct.
I am also confused because it seems like oil companies have to meet a higher standard for deducting foreign income tax (they cannot deduct foreign royalty payments).
The subsidies received by big companies in the oil and gas industry are negligible. That is, they are negligible if you define "subsidy" like Webster does: "a grant or gift of money", or "a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public".
The alleged subsidies that politicians and media talking heads blather about are simply not subsidies using the ordinary English language definition.
The main items alleged to be subsidies are listed below.
1) Foreign income tax credit. In addition to US income taxes on worldwide income, the big, bad oil companies also pay foreign income taxes on foreign-earned income. The tax code allows and various tax treaties stipulate that foreign income taxes paid on foreign earnings are credited against US income taxes. The credit is limited to rate applicable to US income. This allows income taxes paid on the big oil company's foreign-earned income to foreign governments to be deducted from the US government's income taxes calculated based upon worldwide income. This is by no means peculiar to the oil industry. Individuals and businesses in all sorts of industries use this credit. Even expatriate employees and small-time investors use it routinely. The double taxation that would occur absent this provision would make American oil companies uncompetitive participants in global markets.
2) LIFO inventory accounting. If you took a semester of financial accounting, you know that there is nothing really unusual about using LIFO as the accounting convention for inventory valuation. The big oil companies have used this very conservative method of valuation for over a century. Congress, however, sees an opportunity to shakedown the oil companies by banning LIFO. That way, they can force the oil companies to make an immediate write-up of inventories and create a huge taxable extraordinary income event. It would be great for future demogoguery as well because the media talking heads would either be clueless or pretend to be clueless about how the apparent increase in income hurt rather than helped shareholders.
3) Depletion. This is essentially the same as depreciation of capital. Say Chevron bids $100 million for offshore E&P rights somewhere. Then, it spends another $900 million to drill and complete a well. It has a billion invested. Then, it starts pumping $160 million worth of oil. After paying $80 billion in royalties and operating expenses, it enjoys $80 million in net pre-tax cash flow. Isn't it obvious that some fraction of the original investment be deducted from the $80 million when determining taxable income? Depletion is just the way that the $100 million spent on the lease gets subtracted over time.
3) Intangible drilling expense. The real question about the $900 million is not whether it should be deducted from income, but when. Current tax law does not allow all of the deduction when it is actually incurs. Rather, the tax code allows the big, bad oil company to expense some of the $900 million and to capitalize the rest. A whole lot of that $900 million is spent on intangibles -- stuff that has no salvage value but is absolutely necessary for the well. Current tax law treats drilling intangibles as an operating expense deductible against other income. That which cannot be immediately deducted is depreciated over time.
4) Section 199 Production Credits. This is not exactly a subsidy in the ordinary English-language sense of the word, but it's the closest of all of the items mentioned. The Section 199 Production Credit is a tax credit determined by the big, bad oil company's US payroll. Like all other manufacturers and producers of goods, big, bad oil companies get the Section 199 credit. I've never read anywhere that big, bad oil companies lobbied for the Section 199 credit. But if the New York Times, pornography producers, and cigarette manufacturers get the Section 199 credit, is it really obscene that big, bad oil companies get it as well?
5) Ethanol subsidies. The big, bad oil companies resisted ethanol tooth and nail, but Iowa voters are more powerful than big oil.
Liberal foodies bitch about corn subsidies messing up our foods, they should be able to get on board with ending corn subsidies.
But, Iowa Primary!
"But, Iowa Primary!"
I don't think specific state primaries are as important as they once were. Back in the days before the intertubes, newspaper headlines and TV coverage were far more important. Today, sites like "realclearpolitics" and others allow voters to judge for themselves who has a real shot at winning in a more numerically driven way.
The Iowa caucuses are only important because they have been endowed by the media with the quasi-mystical ability to provide the winner with "momentum" and the coveted "front-runner" status.
If people and the media would just say "A bunch of hard-core socons on corporate welfare like so-and-so. Who cares?", the Iowa caucuses would become a non-event.
And as mainstream media has become less important, so too have the Iowa Caucuses.
That's funny, because that's what I say. If the media would get entirely out of the anointing business, maybe these early primaries would be more obviously the irrelevancies they really are.
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