By Kathrine Schmidt
HOUMA — A proposed repeal of tax benefits for oil companies again jumped into the political crossfire last week as lawmakers face mounting pressure to plug a growing federal deficit.
The discussion has been taking place as gasoline prices have been edging toward $4 a gallon and some of the world’s largest oil companies posted big profits on rising oil prices.
The incentives “are extremely important, especially to independent oil-and-gas producers, and make the high risk of drilling and exploration worthwhile,” said Don Briggs, president of the Louisiana Oil and Gas Association, which represents independent and exploration and service companies in the state. But he’s concerned about the issue more than ever, he said, given what he deems a hostile political environment for his member companies.
But oil-and-gas supporters may have a harder time making their argument as talk of cuts to benefits like Social Security and Medicare are increasingly part of the national budget discussion, said Joshua Stockley, an assistant professor of political science at the University of Louisiana at Monroe.
“Justifying tax incentives for oil companies right now is a little bit difficult,” he said, with many lawmakers taking heat from constituents concerned about cuts to the popular programs. “Even some Republicans who have been traditionally very supportive of the oil-and-gas industry are feeling some heat.”
WHAT’S THE PROBLEM?
President Barack Obama has long backed tax increases for oil companies, an effort that has been fought off by Republicans and some Democrats when proposals have been introduced in Congress.
But GOP House Speaker John Boehner of Ohio revived the issue and surprised pundits Monday by saying that tax benefits enjoyed by the largest oil companies deserved a look by Congress during its season of belt-tightening.
“They ought to be paying their fair share,” the Associated Press reported Boehner saying.
Obama quickly penned a letter to congressional leaders, saying he was “heartened” by the statement and took the opportunity to pitch the $4 billion in incentive repeals called for by his 2011 and 2012 budgets.
“We simply can’t afford these wasteful subsidies,” he said in the letter.
While Boehner later backpedaled from the statement, Louisiana lawmakers and industry members rushed to the defense of the tax incentives, saying it makes no sense to impose a further burden on an industry still recovering from last year’s deepwater drilling ban and adapting to a raft of new government regulations.
U.S. Rep. Jeff Landry, R-New Iberia, said any increases in taxes on the industries, particularly independent producers, would ultimately be passed onto consumers via higher gas prices.
“Washington doesn’t have a revenue problem, it has a spending problem,” he said.
Sen. Mary Landrieu, D-La, in a statement, said that the nation, which gets about half its oil from foreign sources, has a “huge deficit of domestic energy.”
“The drilling moratorium in the Gulf just made things worse, creating a kind of ‘jobs deficit’ in the oil-and-gas industry and along the coast,” she said.
At issue are tax provisions that allow oil companies to deduct expenses in oil exploration and development, known as “intangible drilling costs,” from their taxable income sooner rather than later. Companies have also been allowed to deduct a percentage of their revenue, known as a “percentage depletion allowance,” in the same way.
Proponents argue that allowing companies to “write off” the expenses early, instead of over the life of the project, frees up more money for them to drill more wells, hire more people and produce more oil and gas overall. Opponents say it amounts to little more than a tax shelter for companies that already make billions as a matter of course.
John Hofmeister, a former president of Shell Oil who now heads up the Citizens for Affordable Energy nonprofit group, said the issue is different for independent producers and the large integrated corporations. The concerns of the independents are not overblown, he said.
“When you price a job or consider your capital expenditures, you’re looking at the tax implications all the time,” Hofmeister said. “If (incentives) suddenly are eliminated or removed, you have to completely rethink how much you’re going to invest, the risk you take, the people you employ.”
The Independent Petroleum Association of America, a national trade association, said the industry as a whole already pays a federal tax rate of 48 percent, not counting state and local taxes.
“Tax provisions were designed to encourage continued capital investment, which is precisely what they do,” the group said in a January 2011 letter in opposition to the president’s policies. “These are ordinary and necessary business expenses for independent producers, similar to what all businesses deduct.”
The largest oil companies like Exxon-Mobil, Chevron and Shell, do make big profits. But they also pay a lot of tax. For example, Exxon-Mobil made $30 billion in profits in 2010 but paid $89.2 billion worldwide in total taxes, an effective tax rate of 45 percent, according to filings with the Securities and Exchange Commission. The American Petroleum Institute says the industry contributes almost $100 million per day to the federal treasury.
While the tax structure is not as influential for the largest companies, it’s still a factor in how and where they decide to operate, according to Hofmeister.
“It’s a small number, but very important number,” he said.
Whether or not the measures get slashed this time around, some suggest the discussion is more political posturing than a real financial solution.
Even full repeal of the incentives — which the president’s budget says will bring the federal government $43.6 billion by 2021 — wouldn’t make much of a dent in the cuts under discussion. According to The New York Times, President Obama has proposed cutting $4 trillion over roughly the same timeframe, while a failed Republican plan has proposed $5.8 trillion.
An analysis by the nonpartisan Tax Foundation, the Washington-based nonprofit group, suggests that limiting the debate solely to the oil industry is missing the point. A March 2 analysis by its president, Scott Hodge, calls the rhetoric surrounding so-called corporate loopholes “greatly exaggerated.” His compilation ranks oil and gas No. 4 in favorable tax treatment of industries, behind non-taxed businesses like credit unions, the renewable energy business and insurance companies.
“The roughly $660 billion in total tax provisions benefiting corporations may seem large, but it is less than the $1 trillion value of the benefits individuals receive from the tax exclusion for employer-provided health care, and is comparable to the value of tax expenditures benefiting state and local governments,” Hodge said in his report.