Repealing tax breaks for oil companies: common sense vs. congressional thuggery

In Washington, there is an ongoing debate about removing some tax deductions for the oil industry. The president and his party are attempting to change these so that the industry pays higher taxes, then use the money to fund new, cleaner-energy technologies. Republicans are resisting because they oppose tax increases generally, and worry that higher taxes on the oil industry will mean higher prices for gasoline.

Although Democrats narrowly lost a key vote on this issue earlier this month, you can be sure that political demagoguery of “Big Oil” will continue, setting a bad precedent for other American industries that may find themselves out of favor in Washington.

Reality check

That’s too bad, because a number of facets of this debate are off-target – if not downright mythical – and they can be remedied with a little common sense and attention to actual numbers.

First, the oil industry is no more to blame for the price of gas than Kay Jewelers is to blame for the high price of gold. Middle East unrest and the Federal Reserve’s quantitative easing – which is lowering the value of the US dollar – are far more responsible.

Second, oil industry profits, while currently high, are a relatively miniscule part of what consumers pay at the pump. The price of crude, federal, state, and local taxes, refining costs. and distribution expenses all play a much bigger role.

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Moreover, perspective matters in this debate. The $4 billion in “unfair” tax breaks that oil companies receive are significantly less than the $7 billion a year in ethanol subsidies, even though ethanol only accounts for 10 percent of what the petroleum industry produces domestically.

That said, far be it from me to argue that taxes don’t need to be simplified or rationalized.

Over the years, Congress has added numerous loopholes and exemptions, some well-meaning, others to benefit their constituents (voters or donors), to the point where many Americans feel like the pre-Revolutionary French. That government had given so many exemptions to the church and nobility that it was not only always broke, but the middle class bore much of the burden.

But complaints about the particular proposals now being floated do not address the overall tax bill for the petroleum industry; rather they focus on specific deductions. The most dangerous tax hike proposed is the elimination of “dual capacity” protection for US oil companies overseas.

Currently, their work abroad is taxed heavily by host countries, so our government grants these companies deductions on the US taxes owed on that foreign income. This avoids double-taxing the same work, but the president and some in Congress want to do away with it. This will have grave consequences for the competitiveness of American business and our future access to needed energy supplies.

The idea that another existing tax break – the Section 199 domestic manufacturing deduction – will be restructured to exclude the oil industry is a horrible precedent: taxing someone for who they are instead of what they are doing. In fact, every US manufacturer receives this legitimate business deduction. This proposal is more reminiscent of European monarchies levying taxes on their enemies than a broad, democratic tax bill.

Why target just one industry?

Additionally, targeting an industry solely because it is currently profitable is hard to defend. No one is suggesting that farmers should have their tax bills raised when crop prices are high, or that the automobile industry – prospering because their Japanese competitors were hit by a tsunami – should be saddled with an extraordinary tax bill.

There is an old industrial policy theory that states governments should support “sunrise” industries at the expense of “sunset” sectors, but this is a case of wanting to penalize winners to support losers.

And the pretense that the money would go toward renewable energy investment – as Sen. Baucus’s measure proposes – should be considered insulting, since money is fungible, and the higher revenue is a completely separate issue from any spending plans. Renewable energy investment should stand or fall on its own merits, not whether it is being funded by the oil industry.

What is left? Ending these particular tax deductions for the oil industry will not bankrupt it by any means, but the practice of penalizing a specific industry because it is profitable (and, frankly, politically unpopular) opens a door we should not go through. Any tax changes should be done as part of broader corporate tax reform, which will apply universally, and not just reflect a wave of political antagonism.

Michael Lynch, a lecturer at Vienna University in Austria, is president of Strategic Economic and Energy Research (SEER) in Winchester, Mass.