Saturday, 21 May 2011 Paul Driessen
Think repealing oil industry tax incentives will increase federal revenues? Think again.
President Obama frequently says Americans “need to end our $4 billion in annual taxpayer subsidies to oil companies.” The latest Democrat bill would have repealed some $2 billion of what Senator Charles Schumer (D-NY) and others call “subsidies” and “special tax breaks” for Big Oil.
That’s baloney – shameless demagoguery that will inflict further damage on our struggling economy.
Subsidies are cash payments from government to the private sector. Money is taken from the 51% of Americans who still pay income taxes – and transferred by legislators and bureaucrats to companies and activities that “deserve” or “require” these wealth transfers, because the recipients perform an important service and/or could not remain in business unless subsidized with other people’s money (OPM).
The petroleum industry does not receive “subsidies” to produce oil and natural gas. It doesn’t even get “special tax breaks” or outright tax credits. What are falsely described in these terms are actually tax deductions for costs incurred by companies in the process of exploring, drilling, producing and refining the oil and natural gas that energize this nation’s economy and living standards.
These tax deductions are equivalent or similar to deductions claimed by every US business, large and small, for things like facilities depreciation, equipment, utilities, payroll, and research and development. They are intended to ensure that businesses, like individuals, recover their costs and get taxed only on their net incomes. For oil companies those deductions include:
* Geological and geophysical costs, for exploration to assess prospects prior to drilling;
* Intangible drilling costs – equipment, labor, fuel and supplies associated with drilling expensive wells;
* Expensing “tertiary injectants,” water and chemicals injected into older wells to keep them producing;
* Domestic manufacturer’s deductions of up to 6% of income earned from extracting oil and gas (farmers, manufacturers and other producers can deduct up to 9% of earned income);
* Percentage depletion allowance, allowing for gradual recovery of up-front investments in a petroleum (or iron, gold, limestone, et cetera) deposit that is gradually extracted and depleted. The allowance is not available to “integrated” companies that produce, refine and market oil.
White House, congressional and eco-activist claims that repealing these deductions will generate “billions in new revenues” reflect an abysmal grasp of basic business, economic and behavioral principles.
Thankfully, more Americans are beginning to understand that repealing any or all of these deductions will increase oil companies’ individual project and overall operating costs. That means future bonus bids will decline, wells won’t be drilled, fewer deposits will be profitable enough to develop, and wells and fields will be abandoned prematurely. Oil and gas will be left in the ground, crews will lose jobs, tax and royalty payments will dwindle, and the USA will send billions more overseas for imported oil.