Congressional Democrats Concede Oil Companies Don’t Get Subsidies

Mark Green
Posted February 6, 2013

Yesterday, President Obama called on Congress to pass a “balanced mix of spending cuts and more tax reform” to avoid the sequester spending cuts scheduled to take effect March 1.  White House Press Secretary Jay Carney then followed up with, “That means closing loopholes that give tax advantages to the wealthy and to corporations that average Americans and average businesses don't have…So there's the subsidies to oil and gas companies.”

Shortly after the White House press briefing U.S. Rep. Chris Van Hollen of Maryland introduced legislation to replace the current statutory requirement for federal budget cuts with alternative revenue raisers, including a number of tax increases on oil and natural gas companies.  Ironically, in doing so he revealed the specious nature of repeated claims that tax provisions used by oil and natural gas companies are “subsidies” for the industry.  Let’s have a look at the language, my bolds:

BUDGET PROCESS AMENDMENTS TO REPLACE FISCAL YEAR 2013 SEQUESTRATION

Sec. 301. Limitation on section 199 deduction attributable to oil, natural gas, or primary products thereof.

Sec. 302. Prohibition on using last-in, first-out accounting for major integrated oil companies.

Sec. 303. Modifications of foreign tax credit rules applicable to major integrated oil companies which are dual capacity taxpayers.

In other words, Section 199, the Domestic Production Activities Deduction, designed to promote domestic activity by allowing companies to offset the higher cost of doing business in the U.S. and which is available “to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries“  is being taken away – BUT only for oil and natural gas companies.

And in other words, the last-in, first-out (LIFO) inventory method of accounting that has been used for more than 70 years by U.S. taxpayers and is fully recognized and regulated by the IRS is being taken away – BUT only for major integrated oil companies.

And in other words, foreign tax credit rules that are used to allow any, and all, U.S. companies to compete in worldwide markets are being changed – BUT only for major integrated oil companies.

And finally, in other words, when you hear folks describing these items as “subsidies” for oil and natural gas companies that should be removed to ensure fairness in the tax code, realize that they are nothing of the sort, as Rep. Van Hollen’s legislation makes clear.  They are cost-recovery and inventory mechanisms available to all U.S. taxpayers – including “average Americans and average businesses.” Mechanisms that some in Washington want to take away for just one targeted industry, in the first case, or just five companies in the last two.

Using the tax code to punish one industry or a few companies is not fairness, nor is it actually good economics, it is, simply, the wrong choice.