Energy, Taxes, and Flawed Rhetoric

Mark Green
Posted October 5, 2012

Taxes and energy are always hot topics, and as with most political issues the conversation often strays far afield.  So let’s take a moment to ground ourselves in fact so that we can work together to build a more competitive corporate tax system through comprehensive tax reform. 

The Tax Policy Center has a good description of how the corporate income tax works:

"Taxable corporate profits are equal to a corporation’s receipts less its current expenses (including wages and interest), deductions for the cost of inventory when goods are sold, and depreciation of capital investments. U.S. resident multinational corporations pay tax on their worldwide profits, but tax on the profits of their controlled foreign subsidiaries is deferred until those profits are repatriated (that is, paid back as dividends) to the U.S. parent corporation. U.S companies receive a tax credit, subject to various limitations, for foreign income taxes associated with their foreign-source income."

Simply put, a tax is imposed on revenue minus expenses – still, these 89 words paint a picture of complexity. Then, once you dig into the entirety of the tax code you find ample room for honest disagreements – and exponentially more room for flawed arguments. Such an argument was on display in the first presidential debate Wednesday night.

During the debate President Obama stated: “The oil industry gets $4 billion a year in corporate welfare.” Gov. Romney replied that the number is actually $2.8 billion a year and represents an accounting treatment, not welfare. As Romney also pointed out, this isn’t one of those he said/he said things but the president’s own energy experts, the Energy Information Administration (EIA), saying that the president is wrong.  Let’s have a look.

In 2011 the EIA released a report, “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010.”  Table 6 shows “Natural gas and petroleum related tax expenditures” totaling $2.69 billion in Fiscal Year 2010. Broken out:

• Expensing of Exploration and Development Costs (Deferral) $400 million
• Excess of Percentage over Cost Depletion (Deferral) $980 million
• Amortize All Geological and Geophysical Expenditures over 2 Years (Deferral) $150 million
• Tax Credit and Deduction for Clean-Burning Vehicles (Credit)  $250 million
• Natural Gas Distribution Pipelines Treated as 15-year Property  (Deferral) $120 million
• Exception from Passive Loss Limitation for Working Interests in Oil and Gas Properties (Deferral) $30 million
• Temporary 50 Percentage Expensing for Equipment Used in the Refining of Liquid Fuels (Deferral) $760 million

In all of this the EIA, a government agency, lists all tax expenditures applicable to our industry as “deferral.” That refers to the fact that the oil and natural gas industry pays all of its taxes in full – the rules outlined above set out when they’re paid, not how much is paid. The president wants to change the rules to collect more of the taxes up front, basically borrowing from future tax revenue to spend today.  The only item listed as a credit or subsidy is for clean vehicles, which the industry doesn’t get.

So Romney is spot on: Industry gets no subsidies, no credits – just tax deferral and cost recovery similar to what all other businesses get.  During the debate exchange Megan McArdle notes that, “From the look on Obama's face, it wasn't clear to me that the president had understood this.”  If this is true, then perhaps after the debate he could have looked it up.  Instead, yesterday we got this from the president: “The guy who was playing Mitt Romney said he refuses to close a loophole that gives big oil companies $4 billion in taxpayer subsidies every single year.”

If the president wants to have an honest discussion about tax reform, let’s have that discussion.  The first principle of which should be that the U.S. corporate tax system should be one that promotes domestic investment and international competitiveness without picking winners and losers. Any new tax system should provide equitable treatment for all industries – not just those deemed politically important.

Perhaps it is too much to wish for that discussion during an election year, but the president can certainly do better than to keep repeating the same flawed rhetoric that the government is giving money to oil companies, which is “simply not true.”