By Robert L. Brady Jr. - 05/11/11 12:58 PM ET
On Tuesday, Sen. Harry Reid (D-Nev.) and other Senate Democrats introduced legislation to increase taxes on the five largest oil companies. On Thursday, senior executives at those same five energy companies accepted a hasty invitation to Capitol Hill to attend a Senate Finance Committee hearing on the taxes paid by their industry.
Both the bill and the hearing were thrown together quickly. But neither were surprising.
Gas prices are higher than ever, as are the profits of oil and gas companies. What government would continue paying billions in incentives and subsidies to energy companies under these conditions, particularly in the middle of a budget crisis?
Luckily, America isn't doing anything of the sort. But you'd never know it from the debate as it's played out in Congress and the media.
Terms like "incentives" and "subsidies" make for convenient shorthand when discussing complex tax arrangements. But they are misleading at best, and at worst they could incite policies that could negatively affect our nation's recovery and energy progress.
It is a fundamental pillar of the U.S. income tax system that businesses are taxed on net income and not capital. This is what's laid out in the sixteenth amendment to the U.S Constitution. That system has always provided a way for companies of all kind to reclaim costs. Much of what is referred to on Capitol Hill and in the media as "subsidies" are in fact tax deductions, not unlike what other industries receive.
Just some of the many deductions often referred to as subsidies or incentives include: Intangible Drilling Costs, by which companies can deduct the costs that are necessary to finding wells (another unfortunate name, as there is nothing intangible about labor, which can account for 80 percent of the cost of a well); the Domestic Manufacturers' Deduction, a claim available to all taxpayers who produce goods in the U.S. (though the oil and gas industries are limited to 6 percent compared to the standard 9 percent); and the Expensing of Tertiary Injectants, a wonky name for a vital deduction that covers some of the costs associated with maintaining production from older reservoirs.
Part of the reason such deductions get labeled "subsidies" is that few people outside of the IRS --and probably not many inside it -- can easily make sense of them. Reforming the tax code would go a long way to ending the confusion over how much money the government is "giving" energy companies.
But eliminating such deductions amounts to a tax increase for a consumer-driven industry, a move that would negatively resonate through the economy.
First, it would threaten jobs by reducing income for oil companies. And America's oil and natural gas industry currently provides Americans with 9.2 million jobs, mostly at higher-than-average wages, and accounts for 7.5 percent of our national GDP.
Second, it would raise gas prices, as energy companies would be forced to pass these new costs along to consumers. Not a smart move if Congress is looking to appease touchy consumers.
Finally, it would suppress energy production over the long term, as energy companies would have less money for R&D. This would increase our dependence on foreign oil, a policy that the Obama Administration is on record as opposing.
Another lost fact in this debate is that the energy industry already pays one of the highest tax rates in the country. About 44 percent of every dollar earned by oil and gas companies goes to income tax. By contrast, banks pay between 20 and 30 percent. Technology firms pay similar rates -- between 2005 and 2009, Microsoft averaged an effective tax rate of 26.7 percent. And the Obama administration's 2012 budget proposal already includes almost $90 billion in new taxes for the oil and natural gas industry.
Already, the oil and gas industry pays about $100 million, per day, to the U.S. Treasury!
Reducing the number of tax deductions available to energy companies should be part of an overall simplification of the tax code. Streamline the process to make it easier for companies to comply with and simpler for taxpayers to understand. Tax neutrality between firms in an industry and between industries has long been a goal of economic efficiency.
But to eliminate deductions for oil and gas companies while keeping them for more politically correct ones is tantamount to selective prosecution, the singling out of a vital but unpopular industry in a bow to political pressure. The proper term for that is "disincentive."
Robert L. Bradley Jr. is the CEO and founder of the Institute for Energy Research and author of six books on energy history and public policy.
The Hill: The oil tax sideshow