The People of America's Oil and Natural Gas Indusry

Mark Levin: They Are Tax Deductions, Not Subsidies

Jane Van Ryan

Jane Van Ryan
Posted February 2, 2010

Whenever someone in government makes a major announcement, pay close attention to the words used and don't take them at face value. Here's a case-in-point: Yesterday, White House Budget Director Peter Orszag said the president's proposed budget would "eliminate fossil fuel subsidies."

The word "subsidies" completely mischaracterizes the tax treatment afforded to energy companies. In the case of intangible drilling costs, for example, they are tax deductions that are no different than deductions taken by other businesses.

Let's say you own a research company working on a new medicine that may be successful. Many of your business expenses qualify as deductions that can lower your tax liability. Furthermore, your purchases of laboratory equipment also are investments that help to maintain or create jobs at your suppliers' companies and promote economy growth.

In this scenario, you deduct certain research and development (R&D) costs and everybody wins. Important health research is conducted, suppliers continue to fund jobs, and America benefits by gaining scientific knowledge and perhaps a life-saving drug.

Similarly, if you're in the energy business, drilling is an uncertain activity, and significant expenses, such as site preparation, equipment installation and other costs, are required to be successful.

The government is not giving you a handout or credit against your taxes, but merely allowing a current year deduction for those business expenses. In fact, your taxes may actually be higher in the future when you begin to generate income.

However, like the deduction allowed for R&D costs, this tax treatment helps you to:

  • Continue searching for more oil and natural gas;
  • Keep your workers on the payroll;
  • Perhaps expand your business to drill more wells and hire more workers; and
  • Provide affordable energy to American consumers.

Are the research company and the oil company so different that one deserves deductions and the other one doesn't? No.

Is it appropriate to say that one company is receiving deductions while the other company gets "subsidies?" No.

In both cases, the Tax Code permits the deductions and the American public wins.

Mark Levin explained this point particularly well in his radio program last night:

"...[T]hese are not subsidies at all...[Y]ou expense the risk, and you deduct it. And one of the reasons that's important for society is so they drill more holes and look for more oil and look for more natural means more domestic fossil fuel. It's not a tax subsidy any more than a deduction you might take with some parking receipt is a tax subsidy. You're still paying taxes. It changes your adjusted gross amount...So what are the companies going to do? They're going to drill less holes...Now do you think that's in the public's interest?"

Yesterday, Interior Sec. Salazar commented on the administration's proposal to hike taxes on energy companies, saying, "I think the oil and gas industry will do just fine."

But he didn't address the larger question: Could the economy, U.S. jobs, domestic energy supplies and the American public be harmed by the administration's counterproductive tax proposals?