President Obama’s most recent assault on our energy companies was more political playacting by a nervous White House. Speaking just minutes before the Senate defeated S 2204, a bill that would strip five of our largest oil companies of certain tax breaks, the president pitched the vote as yet another “us versus them” moment, of which this administration has authored quite a few.
The choice for the Democrat-led Senate, according to Mr. Obama, was between pandering to the oil giants and helping out ordinary Americans who are struggling to pay $4 a gallon for gasoline. The implication was clear: oil companies are ripping off consumers, making a fortune, and certainly don’t need any extra tax advantages. What wasn’t so clear was how raising taxes on oil companies will relieve the pain at the pump. Hint: it won’t.
President Obama has been hop-scotching around the country trying to convince Americans that his energy policies make sense. Polling indicates that voters are skeptical. They see dollars wasted on failed “new tech’ ventures like Solyndra and the Chevy Volt.
They see electricity prices soaring in states requiring ever-greater consumption of alternative fuels. They see resources sidelined because of the decision to block the Keystone pipeline. They see the president ignoring a sea change in our fossil fuel future, and they see a stop-start approach to long-term investing in nuclear power and offshore oil. Mainly, they see $4 per gallon gasoline.
They also see nothing especially helpful in taking away $2 billion in annual tax breaks from our five largest oil companies and sprinkling those dollars around more questionable “green projects.” The president pitched his argument in terms of the massive $80 billion in profits raked in by our three largest oil firms last year; the numbers are indeed impressive. But even the fellow shining shoes for a living understands that profits in the abstract don’t mean much.
Profits relate to revenues, and taxes relate to profits. According to American Petroleum Institute, the oil industry “pays more in taxes than any other industry.” More to the point, they also report that oil companies’ effective tax rate is considerably higher than the average of the other S&P Industrials – “41 percent versus 26 percent.”
President Obama argued for the elimination of taxpayer “subsidies” doled out to oil and gas producers, but the tax items in S 2204 are not subsidies. They are deductions similar to those granted all manufacturers in the United States. The bill would eliminate the foreign tax credit, the tax deduction for income attributable to oil, natural gas or related products, the deduction of intangible drilling and development costs, the percentage depletion allowance for oil and gas wells and the deduction for qualified tertiary injectant expenses.
These deductions cover costs incurred in searching for and producing oil and gas. They are akin to cost-recovery tax breaks given to other industries. For instance, the depletion allowance is analogous to the depreciation deduction taken by manufacturers on plant and equipment investment. The foreign tax credit allows all companies and individuals to avoid double taxation on income earned overseas. These tax deductions are not huge lollipops distributed to spoiled oil producers; they are, instead, used to calibrate actual profits.
Obama is correct in asserting that the five largest oil companies are doing well. In fact, adding $2 billion annually to their tax bill is not a crushing blow. Our political leaders need to make far more sweeping changes to our tax policies – changes which would simplify our baroque revenue structures and eliminate many of the schemes that exist only to funnel money into one pet cause or another. For some industries (ethanol producers come to mind) a tax overhaul would mean higher taxes.
However, this proposal does not fall under the heading of either meaningful tax reform or serious energy policy. There is no real justification for penalizing our largest companies. If these tax breaks do not serve any purpose, why should they exist for the rest of the industry? Also, if we as a nation would like to see more money invested in energy production, why would we raise taxes on the very entities engaged in that pursuit? It makes no sense.
Consider what S 2204 would do with the money wrested from Big Oil – proposals that didn’t figure prominently in Mr. Obama’s Rose Garden address. For starters, the act would have extended tax credits for energy efficiency – in appliances, for instance. (One has to wonder, shouldn’t more energy-efficient irons or hair dryers be able to compete on their own merits at this point?)
The law would also continue tax credits for investment in alternative fuel refueling, for biodiesel (such as cooking oil) used as fuel, cellulosic biofuels (like wood chips), wind energy, refined coal production and an increased credit for Indian coal facilities, and grants made through the Stimulus Act under the general heading of renewable energy resources. Oh -- and there’s a credit for expensing mine safety equipment. Talk about a grab-bag of political favoritism!
President Obama is not the only Oval Office occupant who has whiffed on energy policy, he is simply the most recent. His is a more dangerous path, however. With the United States standing on the threshold of great new oil and gas generation, promising significant attendant jobs and wealth creation, Obama is, to use his own term, “doubling down” on algae and switchgrass. Is it just coincidence that he chose to use a gambling term? Or could it be, with one third of the $8.3 billion in clean-energy loans made by Obama’s Energy Department on an internal “watch list” that he needs plenty of cash in reserve for future bail-outs?