No industry enjoys the array of tax breaks and subsidies that the oil and gas industry does. No industry needs them less. For all the damage it has caused, the disastrous oil spill in the Gulf of Mexico may provide the political momentum to end this special treatment.
President Obama’s 2011 budget, proposed before the spill, would eliminate $4 billion in annual tax breaks for oil and gas companies. Bills in both houses introduced after the spill would achieve many of the same results. Industry has spent $340 million on lobbying over the last two years to block these sorts of initiatives, and until recently Congress has been eager to do its bidding. This year could be different.
The White House has proposed eliminating nine tax breaks. Some are modest, all are complicated, but in toto they provide a range of cushy benefits — fast write-offs for upfront drilling expenses, generous depletion allowances, and the like — that are available at virtually every stage of the exploration and production process.
The net result, as The Times reported recently, is an effective tax rate on investment far lower than that paid by other industries. That, the Treasury Department argues, has encouraged overinvestment in oil and gas drilling at the expense of other parts of the economy.
Industry argues that these and other breaks are vital to robust domestic production and that both investment and employment would fall if they were eliminated. These arguments, which may have made sense years ago, are much less compelling when oil prices are hovering near $80 a barrel and oil companies — including BP — have been racking up huge profits.
Moreover, a Treasury Department analysis says that ending these breaks would reduce domestic production by less than 1 percent. A separate study by Congress’s Joint Economic Committee says that ending the biggest of the deductions — 9 percent of qualified income from gas and oil produced in the United States — would have zero effect on consumer prices.
Apart from these benefits, two other areas cry out for reform. One is the royalty relief program, enacted by Congress in 1995 to encourage the kind of deepwater drilling that has now landed the gulf, its wildlife and its neighboring citizens in so much trouble. Royalty rates are currently 12.5 percent of the per-barrel price for onshore leases, and up to 18.75 percent offshore.
The law suspended royalties as long as oil remained below a threshold price of $28 a barrel. Prices have long since exceeded that threshold, even adjusted for inflation; and because the law was not tightly written, companies have been able to exploit its ambiguities to save themselves billions of dollars.
Sima Gandhi, a tax expert at the Center for American Progress, a liberal advocacy group, estimates that the losses from lost royalties could eventually exceed $80 billion unless Congress fixes the law. It is high time to review the entire royalty relief program, which at current prices is surely outdated and may be unnecessary.
The administration also needs to look carefully at the oil industry’s use of tax havens abroad. The Senate Finance Committee has already announced that it will examine whether Transocean, the operator of the Deepwater Horizon drilling rig, exploited tax laws when it moved its headquarters first to the Cayman Islands, then to Switzerland. Other oil companies also have foreign subsidiaries; the question is whether and to what extent they use them to dodge taxes. The Times article reported that Transocean alone had saved $1.8 billion in taxes since moving overseas in 1999.
Instead of enriching the oil companies, Congress should end these unjustifiable breaks and focus on encouraging alternative fuel sources that create cleaner energy and new clean-energy jobs.
