Wednesday, April 03, 2013

Break Out

When talks turns to tax reform or limiting federal government spending in any way, many progressives reflexively trot out the well-worn canard that we before we cut a dime of spending (which instantly initiates austerity Armageddon), we should get rid of the “special tax breaks” for big oil and gas companies. Keith Ellison, my representative in the House, regularly invokes these “subsidies” or “giveaways” to Big Oil and seeks to create the impression that we’re giving away millions, maybe even billions of dollars to these companies, money which could instead be used to help “working Americans” (a label that doesn’t apply to anyone working in the oil and gas industry apparently).

In today’s WSJ, Merrill Matthews has a piece called About Those Tax Breaks for Big Oil... which drives a stake into the heart of this long held myth. Interestingly enough, the best evidence that oil and gas don’t get special breaks and in fact are specially targeted comes from a progressive proposal.

Thanks in part to a bill sponsored by Rep. Chris Van Hollen, a Democrat from Maryland and ranking member on the House Budget Committee, it's all much clearer now. The congressman has inadvertently called attention to the fact that those special tax breaks just for the oil and gas industry don't exist. Mr. Van Hollen proposes to create some very special punishments instead. Regardless of the bill's fortunes on Capitol Hill, it has already performed a public service by illuminating the fallacy behind assaults on the industry.

Mr. Van Hollen's ''Stop the Sequester Job Loss Now Act" would raise taxes on individuals—what he calls the "Fair Share on High-Income Taxpayers"—and effectively hike taxes on the oil and gas industry by changing the way their taxes are calculated. The problem with the bill is that the so-called tax breaks the industry would lose are not specific to oil and gas at all. They are widely available to lots of industries.

This goes to the heart of what has always been especially disingenuous about the claims of “special breaks” for the oil and gas industry. These “breaks” are not specific to oil and gas, they just happen to be one of the industries that has taken advantage of them.

Title III of the act goes after oil and gas with: a limitation on the section 199 deduction; a prohibition on using last-in, first-out accounting for major integrated oil companies; and a modification of the foreign tax-credit rules.

Section 199 is part of the domestic production activities deduction that was included in the American Job Creation Act of 2004, which passed with strong bipartisan support, especially in the Senate. It currently provides a 9% tax deduction from net income for businesses engaged in "qualified production activities" in the U.S. Those activities include manufacturing a product, selling, leasing or licensing it, and engineering and software activities related to that production. The deduction was intended to encourage domestic manufacturing, and in the hope that the tax break could provide a slight competitive advantage against foreign competition.

The oil and gas industry, especially in its extracting and refining, is heavily involved in U.S. manufacturing. Congress already penalizes the industry by only giving it a 6% deduction, rather than the 9% that other industries receive.

So not only is this not a “special” tax break for oil and gas, the industry actually doesn’t get the same benefit from it that other industries do.

But whatever the percentage allowed, this isn't a special deduction for oil and gas. Many other manufacturing industries—including farm equipment, appliances and pharmaceuticals—take the deduction. Mr. Van Hollen's bill refers to the disqualification of two industries from these benefits as a "Special Rule for Certain Oil and Gas Companies." In terms of fairness, it's like telling oil company workers that they can't take the home-mortgage deduction anymore because they work for politically targeted companies.

The reality is that the oil and gas industry makes for an easy target for cheap demagoguery about “fairness.” Progressive like to talk about jobs for “middle class” Americans yet never acknowledge the jobs created directly by the oil and gas industry in the United States or indirectly be providing lower energy costs for other industries. And when it comes to taxes, few industries pay more than what oil and gas does.

Ironically, USA Today just published the top-10 list of companies that paid the highest U.S. income taxes as of 2012, and oil industry companies took three of the slots. Number one was Exxon Mobil at $31 billion, followed by Chevron at $20 billion, and sixth was ConocoPhillips at $8 billion. That is about $60 billion in taxes among them, more than the other seven companies on the list—including Apple and Microsoft—combined. Don't look for a presidential attack on Apple or Microsoft anytime soon.

And don’t expect progressive attacks on oil and gas companies to stop anytime soon no matter how unfounded they may be.