A closer look at those oil 'subsidies'
The Kansas City Star
President Obama has railed constantly against “billions in tax giveaways” for oil companies and give him credit, the message has become embedded in the minds of many voters. When oil prices were more than $100 a barrel and people were having trouble paying for their latest fillup, it’s natural for people to think they’re getting shafted while big oil companies and “speculators” are unfairly piling up profits.
But the tax treatment of oil companies differs little from how the law treats every manufacturer, as Deborah Byers of Ernst & Young explains in a piece for Forbes.
Most of the so-called subsidies simply involve timing issues, or when certain costs can be expensed or deducted from taxable income. One of the most important of these, Byers says, is the deduction for intangible drilling costs, or IDCs.
These costs are mainly for labor and other expenses that come with drilling a well. They’re analogous to the research and development costs that tech and pharmaceutical companies incur when bringing out a product. The IDC deduction lets oil drillers deduct those costs when they’re paid, rather than expensed gradually over time.
Byers notes that the ability to do this is critical to the cash flow of many drillers. Keep in mind, she says, that 90 percent of the wells in the U.S. are drilled by independents, not by Big Oil. If these deductions were taken away, many drillers would cut back on operations — meaning fewer wells, fewer jobs, and less revenue for the government.
Another important provision involves “percentage depletion,” which tracks the diminishing value of a resource as it’s produced. The way this provision works makes it usable only by small producers and individual royalty owners, not Big Oil.
The Obama administration wants to get rid of both of these provisions, as well as the manufacturing credit that’s available to oil companies as well as most other industries. The administration says taking away these provisions would bring in $40 billion more over a 10-year period. But that’s only $4 billion annually, a tiny amount relative to the gargantuan Obama deficits.
As with the Buffet tax, Obama is trying to make a big deal out of something that wouldn’t amount to much in terms of revenue. This isn’t about fiscal rectitude, it’s pure politics. If he got his way, it would mean less domestic drilling and fewer jobs. It would be as counterproductive as the windfall profits tax of the 1970s, which resulted in less drilling, less production and higher oil imports.