Oil Company "Subsidies" Clarified

We’re still seeing a flood of calls from both sides of the aisle to cut subsidies as part of an overall strategy to reduce spending in Washington. While there is plenty available to cut, there has been a steady and disingenuous conflation being promoted by the White House which seeks to describe certain tax benefits received by companies in all manner of industries as “subsidies for big oil.” Just last week Tim Pawlenty was taking to the stump in an attempt to call out these warped descriptions.

MANCHESTER, N.H. – Former Minnesota Gov. Tim Pawlenty called a White House proposal to reduced tax breaks for oil companies “ludicrous” after a gathering of tea party activists.

“I think we should have a discussion about all subsidies,” Mr. Pawlenty told Washington Wire at a forum for 2012 GOP presidential hopefuls. “But the Obama proposal is ludicrous. I mean the worst thing we could do is raise the cost burden on costs on energy and oil… What he’s proposing is a tax increase on energy at a time when the gas is $4 a gallon. It’s preposterous.”

For those seeking to sort out the definitions of the terms being used, the American Petroleum Institute has published a new paper doing just that.

Contrary to what some in politics and the media have said, the oil and natural gas industry currently enjoys no unique tax credits or deductions. Since its inception, the US tax code has allowed corporate tax payers the ability to recover costs and to be taxed only on net income. These cost recovery mechanisms, also known in policy circles as “tax expenditures”, should in no way be confused with “subsidies”, i.e., direct government spending.

Here are a few of the items which are being incorrectly identified as “subsidies” inside the beltway:

Intangible Drilling Costs – Companies which engage purely in energy exploration and discovery can recover their costs related to exploration at tax time at a rate of 100%. This lessens the burden on energy providers for the number of “dry holes” which may be found in the process. Integrated companies (i.e. “big oil”) can recover these exploration costs at 70%. Not a subsidy.

Domestic Manufacturer’s Deduction (Section 199) – A deduction (not a credit) equal to 9% of income earned from manufacturing, producing, growing or extracting in the United States, is available to every single taxpayer who qualifies in the U.S. The oil and gas industry, and only the oil and gas industry, is limited to a 6% deduction.

Percentage Depletion – The percentage depletion deduction is a cost recovery method that allows taxpayers to recover their lease investment in a mineral interest through a percentage of gross income from a well. This depletion method is not available to companies that produce oil as well as refine and market it (i.e. “Big Oil”.) This is available to all extractive industries (gold, iron, clay, etc) in the US and is in no way unique to the oil and gas industry.

There are more, so download the paper and read them for yourself. Then, when you hear your congressman talking about all of the “subsidies” for big oil, you can set them straight based on the facts.

To be clear, the federal government does engage in the handing out of a lot of actual subsidies, including those for ethanol and a variety of wasteful programs which are essentially failures on their own merit without feeding off the teat of Uncle Sam. And we should certainly be looking at those areas as way to address cost cutting. But trying to depict tax credits used by the energy industry – in the same fashion as every other industry – as some sort of special love festival for Big Oil is dishonest.