In her speech to the Democratic National Convention this past summer, Senator-elect Elizabeth Warren exhorted that the system in the United States is “rigged against” ordinary people, citing numerous injustices, one of which being that “Oil companies guzzle down billions in subsidies.” The oil industry has become a frequent target of the democratic party, including President Obama as many find their consistently high earnings reports difficult to reconcile with a lackluster economy.
With a showdown in congress looming over the rounds of tax breaks set to expire alongside spending cuts, lawmakers are looking for places to balance the budget. It is clear that there is little hope of agreeing on anything that could be termed a 'tax increase,' attention has shifted to the oil and gas industry, as Speaker John Boehner has even admitted he 'won't rule out' targeting oil industry tax breaks.
Why do oil and gas companies receive assistance in the tax code?
The United states levies taxes not only to fund the operations of government, but also to help encourage a growing economy by spurring investment and job creation. Each industry receives different treatment by the tax code, depending on the particularities of their product. The oil and gas companies make record profits from a product that is unlike any other. It is the magnitude of their earnings that arouses suspicion over the tax credits, as President Obama elucidated in his campaign speeches, saying that we needed to end subsidies that “oil companies don't need.”
What makes the oil and gas industries unique?
Oil companies such as ExxonMobil and British Petroleum have an uncommonly global reach. Former CEO of ExxonMobil Lee Raymond repeatedly stated during his tenure that the top priority for his company was 'reserve replacement,' meaning that they tried to match every barrel extracted from the ground with discovery of new 'equity reserves,' or proven oil wells. It was a corporate tactic aimed at fighting the criticism of an industry that was so clearly unsustainable. As a result, oil companies have sought reserves in more and more far-flung regions, and have acquired a role in numerous regional conflicts while navigating a path between their corporate interests and regional stability. They seek a uniquely obfuscated product, one that is finite and often difficult to extract. The costs associated with all of these factors could render the companies unable to compete in a global market, as many of the world's oil reserves are under control by state-owned companies. While the credits are aimed at leveling the playing field for the large corporations, critics question if they are a bit too generous.
What are the tax credits?
There are a plethora of subsidies and deductions that benefit the oil industry, the following are a few that have aroused particular interest in the budget debate. Percentage depletion allowance is meant to encourage investment in high-risk, exhaustible commodities, this tax credit allows a 15% deduction based on average daily production (roughly 1,000 barrels of oil.) Given the nature of the oil and gas industries, this deduction is considerably higher than comparable credits in other sectors, and makes a sizable portion of a company's earnings tax free.
The government also funds new tactics in petroleum extraction in research and development funding through the Office of Fossil Energy, while President Obama last year proposed cutting their budget last year by $417.8 million, some conservative groups, such as the Heritage Foundation suggest that he go even further, by leaving only enough money in the budget to maintain the strategic petroleum reserve. Could this potentially be an area of common ground for the two parties?
Finally, the foreign tax credit is available to any company that operates and pays taxes overseas, but it has drawn particular attention because of the amount of savings oil companies can glean from it. The credit is meant to prevent a company that already pays taxes on earnings in other countries from 'double dipping' and paying them again in the United States. The credit keeps companies competitive against many state-owned corporations that pay taxes only in their home country.
How much money would ending them provide?
The real savings are a source of debate, relinquishing all explicit oil tax credits could save the government $21 billion over 10 years. President Obama has pushed for a more moderate elimination of almost $40 million in oil industry tax loopholes over the next ten years. The question is which credits to target, and whether to remove them entirely, or leave them in place with a smaller reach. Some subsidies, such as the foreign tax credit and the percentage depletion allowance are available to companies in different industries; critics of the cuts claim that disallowing large petroleum corporations from claiming them would be a type of fiscal bullying.
Would it affect the price at the pump?
While ending subsidies for the petroleum industry could have enormous implications for the federal budget, this is the question most relevant to ordinary Americans. While gas prices often define the national mood and have a galvanizing effect on presidential approval ratings, they would be equally unaffected by elimination of oil company subsidies as they are by the fiery populist rhetoric surrounding the issue. The fact remains that the issue of pump prices is far more complex than even our arcane petroleum industry tax rules. It is subject to commodity speculation, OPEC and factors far beyond the reach of the United States government such as the fluctuating price of crude. If oil companies took any actions against decreased federal assistance, it would not be to inflate their prices, as it would drive away consumers. They would instead seek other cost-reduction tactics which they have been long familiar with, namely cutting jobs.
