A closer look at those oil 'subsidies'
E. Thomas McClanahanPresident 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.
George Harris
Kansas City
11 months, 2 weeks ago“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.”
Does this mean that entities having large oil reserves are more or less credited with a capital asset that they can then depreciate as it is sold? So if I own a parcel of land and discover oil, I don’t pay capital gains on the increase in value, but I get to depreciate the asset as it’s sold off?
George Hunsucker
Northland
11 months, 2 weeks agoGeorge, if the oil is being harvested, then by definition the land is becoming worth less.
Depletion merely lets a producer recover her/his cost of the asset as the product is produced. Similarly, a manufacturing business “depreciates” a piece of equipment based either on production or time. As parts are produced or time passes, the machine becomes worth less. Depletion does the same thing for natural resources….
Capital gains come into play when you SELL the actual property. If the sales price is worth more then the depreciated/depleted value, then you have a capital gain….
Sure sounds “sinister”, doesn’t it???? NOT!
Mark Hastert
11 months, 2 weeks agoAny way way you look at it it’s money in their pockets. When the government foregoes tax revenue it’s a defacto subsidy to the beneficiary. There may be good reasons but perhaps periodically those reasons need to be reexamined.
George Hunsucker
Northland
11 months, 2 weeks agoGovt. has NO CLAIM on anyone’s money… they take it and waste a large majority of it…
Mark Hastert
11 months, 2 weeks ago“Govt. has NO CLAIM on anyone’s money…” Read more here: http://voices.kansascity.com/entries/closer-look-those-oil-subsidies/#storylink=cpy
Actually George it does, it’s in that Constitution you guys are always going on about. Check it out it’s a must read.
George Harris
Kansas City
11 months, 2 weeks agoGeorge, my question is an accounting question, and the answer wasn’t clear in article Tom provided a link for. I thought maybe he would know the answer. I don’t think you understood the question. Not everything is about ideology and that wasn’t the intent of my question.
George Hunsucker
Northland
11 months, 2 weeks agoGeorge, I gave you an accounting answer… read my 2nd & 3rd paragraphs…
Do you understand depletion now and capital gains? If not, what are your other quesitons….
Kent Mueller
11 months, 2 weeks agoThomas, this was an important piece to write. It shows how silly and shallow those are who rant about the “Big Oil Subsidies”, the president included.
Some time ago, when I hear someone criticize big oil for their subsidies, I started the practice of asking them specify the subsidies to which they were referring. I have asked the question many, many times. I have yet to get a single response from any of them.
Kent Mueller
11 months, 2 weeks agoMark, you use a very loose definition of subsidy. Your definition would include the deductibility of a business’s cost of sales as a subsidy. That is a rather odd thought.
I do agree that all tax rules, as with other rules, should be periodically reviewed. But in this case, are you saying they should be reviewed just for the energy sector, or for all businesses?
Kent Mueller
11 months, 2 weeks agoAnother question, Mark. You said that any way you look at it, it’s more money in their pockets. Are you saying they make too much money? If so, by what measure? Yes, the make a lot in pure dollars, but they are dealing in huge dollars. You have to look at percentage returns. Do you think those are too high? If so, by how much?
You have implied big oil makes too much money. If that is what you meant, please explain.
Kent Mueller
11 months, 1 week agoMark?