The Dems' Big Oil Tax Break Trap
Senate Democrats are circulating a bill to cinch up oil company tax loopholes and use the resulting revenue to pay down the deficit.
The bill would take aim at the "Big 5" - BP, Chevron, Shell, Exxon, and ConocoPhillips - by tinkering with foreign tax credits, dumping manufacturing and intangible drilling expense deductions, terminating the percentage depletion allowance, ending deepwater royalty relief, and requiring the Big 5 to capitalize costs for injectants used to squeeze more oil out of wells.
Several observations are in order.
First, reducing the deficit is not the goal of this bill. Gotcha politics is. Harry Reid et. al. have brewed up a cow splat for dogmatically anti-tax Republicans to step into, so they can be portrayed in next year's fun-filled TV ads as coddling Big Oil and voting against deficit reduction.
Second, some Republicans seem willing to oblige, as they dutifully repeat shopworn talking points that putting the arm on oil companies for more tax revenues inevitably would discourage drilling and drive up gas prices.
In the world outside talk show sound bites, however, the impact of ending oil industry tax preferences likely would be small potatoes. Price, not tax, is the dominant consideration guiding exploration and production decisions.
In 2009 Senate testimony, a Resources for the Future research fellow estimated that eliminating oil industry tax preferences would raise fuel costs for the average American by $1.40 per year – approximately equivalent to one cup of really bad coffee – and cause domestic oil production to crash by a whopping 0.36 percent.
Third, the energy subsidies argument too often devolves into a tiresome ritual of the pot commenting on the kettle's color choices. Democrats moan about fossil fuel tax dodges, Republicans whine about handouts for renewables, and neither side indulges the voters with an intelligent discussion about what the federal government's energy policy should be and how taxes and other fiscal tools could best be employed to carry it out.
In truth, all forms of energy are subsidized to some degree. Not one energy resource – oil, gas, coal, nuclear, renewables, or energy efficiency – exists in an Ayn Rand fantasyland, free of federal favors, be they tax preferences, R&D support, loan guarantees, insurance, or other assorted forms of largesse.
That's not necessarily bad. The trick is to identify the role that tax preferences and other forms of subsidy should play, if any, in a country that needs to tighten its belt, rationalize the tax code, and secure clean, reliable, and affordable energy. That discussion, not gotcha games, should be what we're seeing from Congress.