Monday, May 9, 2011

Eliminating Oil Subsidies: Two Cheers For President Obama

Jerry Taylor and Peter Van Doren of the Cato Institute write in the May 3, 2011 issue of Forbes

Last week President Barack Obama responded to rising public anger over soaring gasoline prices by banging the drums for the elimination of various tax breaks enjoyed by the oil and gas industry. Although House Speaker John Boehner, R-Ohio, initially suggested that he might be open to President Obama's proposal, the House GOP leadership chose to answer the president's weekly radio address--which advocated elimination of those tax breaks--with freshman Tea Party Congressman James Lankford, R-Okla., who charged that the plan was about "hiking taxes by billions of dollars."
"The president may think he's punishing CEOs of big companies," said Lankford, "but his plan will hurt the everyday consumer of energy and imperil the jobs of millions of hardworking people in American-based companies."

First of all, let the record show that President Obama is right and the GOP is wrong about these tax breaks. They make the economy less--not more--efficient and do nothing to reduce prices at the pump.

Although the president hopes to eliminate eight specific tax breaks--which cost the Treasury $43.6 billion over 10 years--only three, accounting for $31.9 billion of that total, are particularly important. Conservatives have no business defending any of them.

The largest tax break at issue is a tax credit passed in 2005, which is available to all U.S. manufacturers. Oil and gas companies qualify for that credit, so they will likely deduct somewhere in the neighborhood of $18.3 billion from their tax bill over the next 10 years. Note that this isn't really an "oil subsidy"; it's a manufacturing subsidy that oil and gas companies--along with many other companies--enjoy.
Rigging the tax code to make investments in manufacturing artificially more attractive than investments in something else is an enterprise designed to harm non-manufacturers for the benefit of ... manufacturers. Conservatives who want government to leave markets alone have no business throwing their political bodies in front of this tax break. If their political rhetoric means anything, they would see the president's bid and raise him by calling for total repeal of this tax break for everyone, not just for oil and gas companies.

Another significant tax break allows companies to accelerate the deductions of the costs of labor and various other inputs associated with drilling oil or gas wells. Now, there's nothing wrong with deducting the cost of doing business from one's tax bill. In other industries these expenses would be capitalized and deducted over time as income is earned. But in the oil and gas sector, the tax code allows oil and gas firms to deduct 70% of these expenses in the very first year of a well's operation and the remainder over the next five years. These accelerated deductions are far more valuable to small producers than they are to large producers because the Alternative Minimum Tax for vertically integrated oil companies usually prevents "Big Oil" from using this tax break to its advantage. Still, it will likely cost the treasury $12.4 billion over the next 10 years.

Finally, small oil companies (not, incidentally, "Big Oil" companies) are allowed to deduct a specified percentage of their gross income from the taxes due from producing fields rather than simply deduct the actual costs of the capital investment over time. The subsidy arises when the deductions exceed the actual investment costs. This aspect of the tax code will cost the treasury $11.2 billion over 10 years.

There is no good economic argument for either of these tax breaks. They are simply statements that "we won't tax you for the cost of doing business like we would if you were in any other industry because ... we like you!"
Many conservatives argue that the elimination of these energy tax provisions and others like them for other sectors are tax increases. They are correct in a narrow sense. But in a larger sense they are incorrect because the elimination of such tax provisions makes the tax code more neutral and a more neutral tax code is a more conservative tax code.

Whether you call them "subsidies" or "purple roses," what's going on here is the elimination of a favor not provided to other tax-paying businesses. Such favors direct private investment to the favored businesses and away from the unfavored as market actors chase the artificially higher profits in the favored sector.
by Jerry Taylor and Peter Van Doren, Senior Fellows at the Cato Institute
May 3, 2011

No comments:

Post a Comment