Obama’s Energy Tax Myths

BY MERRILL MATTHEWS

President Obama says special tax breaks for the oil and gas industry must end. The demand always prompts puzzled gazes among tax and energy-industry experts, who ask: What tax breaks?

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. But rather than demonstrating the alleged oil and gas industry tax breaks, the congressman inadvertently confirms they don’t exist. That makes his bill more about punishment than fairness.

Regardless of the bill’s outcome, it has illuminated the fallacy behind the industry assaults.

Van Hollen’s “Stop the Sequester Job Loss Now Act” would effectively hike taxes on oil and gas by changing how their taxes are calculated. The problem with the bill is the so-called tax breaks the industry would lose are not specific to them at all. They’re available to many industries.

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 included in the 2004 American Job Creation Act, which passed with strong bipartisan support. It currently provides a 9% tax deduction for businesses that manufacture, sell, lease or license a product, as well as related engineering and software activities. The deduction was intended to give domestic manufacturing a slight competitive advantage against foreign competition.

Congress already penalizes oil and gas companies by only giving them a 6% deduction, rather than the 9% that other industries receive.

But this isn’t a special deduction for oil and gas. Many other manufacturing industries take the deduction. Van Hollen’s bill refers to the disqualification from these benefits as a “Special Rule for Certain Oil and Gas Companies.” In terms of fairness, it’s like telling oil company workers they can’t take the home-mortgage deduction anymore because they work for politically targeted companies.

Van Hollen targets the last-in, first-out accounting method. LIFO assumes the last inventory in is the first used, sold or distributed-an accounting method often used by commodity-type industries. Van Hollen proposes to reduce the inventory options available to the oil and gas industry, but all other industries can keep LIFO.

Critics of the industry claim there are other ways of appraising oil and gas inventory that would result in a higher value, and thus companies would have to pay more taxes. But that’s like offering individuals the choice of taking the standard deduction or itemizing on their returns, and then demonizing those who choose the approach that minimizes their income tax obligation.

The third provision of Van Hollen’s bill seeks to change the foreign tax-credit rules-but only for integrated oil and gas companies. American companies operating in foreign countries have to pay those government’s taxes. The U.S. government generally gives companies operating in foreign countries a tax credit to offset their foreign taxes, so the companies are not taxed twice. That credit can sometimes apply to certain royalties paid to foreign countries.

Van Hollen’s way of repealing this tax break for one particular industry is to assert the royalties cannot be called a tax when they apply to that industry: “[A]ny amount paid or accrued by a dual capacity taxpayer which is a major integrated oil company to a foreign country or possession of the U.S. for any period shall not be considered a tax.” If an oil company can’t call a foreign royalty a tax even when it acts like one, then it cant get the foreign tax credit.

Ironically, USA Today recently published the top-10 list of companies paying the highest 2012 U.S. income taxes, 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.

The oil and gas industry already pays its “fair share” of taxes. Van Hollen’s bill isn’t about ending special breaks, it’s about punishing success.

Merrill Matthews is a resident scholar at the Institute for Policy Innovation in Dallas

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