A recent Andrew Breitbart’s Big Government article has provided even more sordid details of a story we’ve been covering about a liberal agenda revealed. It seems that many far left factions with a little help from the New York Times are going to great lengths to misrepresent taxes paid by American oil companies. These extreme groups have formed a circle of collusion that is evidently more concerned with pushing liberal policies than stating the facts. Their attacks claim that energy companies are dodging taxes through subsidies and loop holes. This deceiving conclusion comes in the form of a Times article that as Big Government points out:
“appears to have been heavily edited by a cadre of left leaning groups, including ACORN President Maude Hurd, Citizens for Tax Justice, Center for American Progress and the Clean Energy Works campaign.”
The Times article falsely asserted that oil companies are heavily subsidized and given massive tax breaks. To prove the story was riddled was inaccuracies IFL even posted counterpoints to each argument in a post “IFL Responds to Clean Energy Works AND The New York Times.” The liberal agenda behind this all first came to light in a leaked Clean Energy Works memo by David Di Martino. At a time when our country is trying to create jobs and recover from an economic recession it seems particularly disheartening that liberal groups are trying to tear down American businesses. Hopefully the public and those in Washington will continue to watch as this story unravels.
The classic superhero, a mysterious person of the night, who anonymously swoops in to save the day without expectation of credit or monetary gain, has time and again captured the American imagination. The BP spill disaster has proved an opportunity for one such citizen to properly assess the situation and help solve the problem without anyone discovering his true identity. Unfortunately, more often than not, when persons are involved in a situation they do not fully understand, they do not act as a problem solver but a problem maker.
Over six weeks ago, Cal-Berkeley Professor Robert Bea received an anonymous call from a mystery plumber late one night who had designed a containment cap he felt could control the gushing well. Bea saw the potential of the cap, which utilized on a larger scale the same techniques plumbers use when repairing leaky pipes, and forwarded it to the US Coast Guard. More than a month later, a similar containment cap was put in place, and has successfully capped the main gusher. In this unique circumstance, someone without any oil expertise was able to assist in problem solving however this is a rare circumstance considering the complexity of offshore drilling.
President Obama has appointed a commission to look into the causes of the oil spill and provide recommendations for the future of drilling off the coasts of the United States. While this momentous task may not have the tabloid appeal of the late night plumber, the conclusions of this commission will shape future offshore drilling endeavors, acting to enhance or hinder safety and risk management. Boring holes into underground reservoirs buried miles underwater requires technical specificity the likes of which NASA has used to travel to the moon. Engineers and experts need difficult degrees and years of experience before being trusted to carefully plan and complete well operations. Unfortunately, the Administration’s commission does not demonstrate a respect for the difficulty of deep sea drilling, relying instead on politicians and environmentalists with no prior drilling experience.
Though it is a savvy DC political move to appoint a commissions whose conclusion is predetermined by its membership, in this case it could backfire. Due to the complexity of deep sea drilling and exploration, and the rapid advancement in technology and procedure, often work on an oil rig involves quick reactions, as opposed to rigorous predetermined regulations that would act to bind the hands of the crew. If the oil commission lays out a static set of procedures and technologies for drilling, advancements in safety and risk control would come to a halt. Furthermore, on an oil rig where flexibility is necessary when facing a difficult set of circumstances, regulations could act as an impediment and increase the risk of disaster.
Experienced offshore engineers are aware of the necessity of flexibility mixed with rigorous safety requirements on a rig, but how could an environmental lawyer, a former governor, or a physics engineer know about day to day operations on an offshore rig. Not one person on the president’s oil commission has any experience in the offshore industry.
The majority of offshore drillers follow a rigorous set of industry standards. From the initial reports, it appears that BP habitually ignored best practices in order to cut costs. Punishing an entire industry that has had a near spotless drilling record in the last 40 years for the reckless behavior of one company is overkill. More likely, this disaster that has caused so much pain for our Southern shore is being used for political purposes by those who naively want to eliminate drilling. Unfortunately, the anti-fossil fuel crowd is sorely out of touch with reality. Clean and renewable technologies are nowhere near a point where they could replace oil, natural gas, and coal. Even environmentalists would acknowledge that the transition would take at least 40 years, and even then these vital natural resources would be an important part of the energy mix. If we were to eliminate drilling off our shores, we would see increased reliance on foreign oil, lost jobs, a shrinking economy, and a drop in the standard of living here at home.
As the president’s unqualified commission proceeds with the investigation, let’s hope that it can take on a problem solving role as opposed to one of problem making. We need oil and gas for years to come, and we need to extract it safely. Adding onerous regulations that threaten this safety would be disastrous, yet are a real threat as a result of the inexperienced commission chosen by the White House. While the press certainly appreciates an unlikely hero during a crisis, the future safety and success of the U.S. energy industry demands the expertise of those with real technical expertise and veteran experience.
In a memo recently cited by E&E news, communications firm CEW (which appears at the bottom of this post, and can also be found HERE) outlines the possible method of using the New York Times as a centerpiece of a “tactical campaign” to reframe proposed tax increases on American consumers as “The Big Oil Welfare Tax”. This is a left wing campaign strategy to use the New York Times as a tool to push a liberal agenda that would increase taxes on energy companies and consumers. An actual article in the New York Times seems to be one example of this strategy in action. The article is riddled with inaccuracies and misrepresentations that are easily spotted by anyone with a basic understanding or background in tax policy. To understand the full level of the recent articles deception we have included counterpoints (below) to all the flawed and false statements. The plain text is the actual NY Times article while the italicized, bolded, and color-coded sections are the counterpoints containing the facts. This type of dishonesty seems to be an ongoing pattern with the far left and provides yet another black eye to the credibility of the Times.
As Oil Industry Fights a Tax, It Reaps Billions From Subsidies
By David Kocieniewski
July 4, 2010
The New York Times
Copyright 2010 The New York Times Company. All Rights Reserved.
When the Deepwater Horizon drilling platform set off the worst oil spill at sea in American history, it was flying the flag of the Marshall Islands. Registering there allowed the rig’s owner to significantly reduce its American taxes.
The owner, Transocean, moved its corporate headquarters from Houston to the Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also helped it avoid taxes.
The United States taxes the worldwide income earned by its residents. Most other countries only subject income earned within their borders to their income taxes. For companies like Transocean, with worldwide operations and major competitors based in countries that do not tax outside their borders, this was likely a matter of survival if Transocean were to be able to compete for non-US projects. For projects undertaken in the United States, companies based outside the US and companies in the US are generally taxed the same, so it was unlikely a strategy motivated by reducing US taxes on work done in the US, including the Gulf of Mexico.
The issue this raises is the uncompetitive state of the US tax law when applied to income earned completely outside the country. Rather than trying to level the playing field and keep US companies in the US, surprisingly the current proposals of the Obama Administration would actually make this even worse--likely prompting the US to lose even more companies, have them bought out by foreign investors (e.g. the loss of Anheuser Busch) or have their foreign operations acquired by foreigners, all of which result in the loss of US jobs.
At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon — a deduction of more than $225,000 a day since the lease began.
Business income earned in the US is subject to a 35% net income tax. The tax is due on all income in excess of the costs incurred in earning that income. These are the rules that apply to all businesses.
In drilling the well in the Gulf, BP hired the drilling rig and paid a daily rental expense. That expense, just like when a computer company rents office space, a restaurant rents its building, or a construction company rents equipment, is "deductible" in determining BP's net income in the US. (Note that the rent paid by BP was US income to the drilling rig operator and immediately included in its US tax return) The term "write off" as used in this article is the way the New York Times has chosen to describe the normal deduction of costs under our net income tax. Note that BP was only allowed to deduct 70% of these costs as spent, and the remaining 30% are deductible over a period of years. So, as compared with many businesses that can deduct 100% of similar costs as incurred, the oil industry must defer the deductibility of some of these costs. Not exactly a subsidy compared to how other industries are treated.
With federal officials now considering a new tax on petroleum production to pay for the cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, as well as an increased dependence on foreign oil.
BP has committed to pay for the cleanup, and has agreed to put into escrow $20 billion. If more is needed, they have committed to pay that. Further, an oil spill tax already is in place, and proposals to raise this tax to over 600% of the current tax, have not been opposed by industry. The total taxes to be collected over the next decade would be well over $20 billion. In addition to this, the Administration has proposed numerous other increases in the taxation of oil and gas in the United States, and it is understandable that increasing such taxes is not something that the industry would favor.
But an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.
This is an absolute fallacy, but it doesn't deter people from making the assertion. In fact, the Center for American Progress, quoted later in this article, notes that the total amount of "tax subsidies" in the tax code amount to almost $1.1 trillion per year. Of this amount, the "tax subsidies" related to oil and gas are around one third of one percent--or just under $4 billion. And when we use the term "subsidies", we certainly use it "loosely". The main items that make up the so-called oil and gas subsidies fall into three categories:
(1) Deductibility of drilling costs, mostly labor and rentals like the drilling rig mentioned above. No one disputes that these costs are deductible, and the only issue is the timing of the deductibility--hardly what most people would regard as a "subsidy".
(2) The deduction for "domestic production activities", enacted in the 2004 Jobs Bill and designed to give all domestic producers and manufacturers, of all kinds, a deduction to promote jobs in the domestic producing an manufacturing sectors. This applies to coal, iron, all other mineral production, farming, manufacturing, construction, architectural services, computer software, and even the grinding of coffee beans at the local coffee shop and the cutting of keys at the department store. In fact, oil and gas production activities only get two thirds of the level of the deduction that all others get. Somehow this is described as a "subsidy" to oil and gas, when in reality it is a penalty over all others. You will note that later in the article Senator Menendez refers only to the "manufacturing" part of this, but the law itself clearly describes this as the deduction for "domestic production activities", and includes manufacturing in that definition.
(3) Percentage depletion deduction for oil and gas properties. This is a method of calculating the deductible costs in determining net income from oil and gas activities. It applies to all other mining and mineral activities as well. But, for oil and gas, and again only for oil and gas, it is severely limited. First it is limited to independent companies and to royalty owners. Integrated oil and gas companies, such as those generally referred to as Big Oil ( ExxonMobil, ConocoPhillips, Chevron, Marathon, etc.), do not even qualify for it at all. For those that do qualify, it is further limited to the equivalent of 1000 barrels per day of production. No other mineral production is limited in such a way. So again, to describe this as a "subsidy" to oil and gas, when it is more limited than for any other mineral producing industry, is outright wrong.
According to the Joint Committee on Taxation in its Tax Expenditures Report for 2009-2013, oil and gas "tax expenditures" amount to under $4 billion per year, but subsidies and expenditures for renewables amounted to over three times that amount per year. And amounts committed to renewables and energy efficiency provisions in the six month period at the end of 2008 and early 2009 under stimulus provisions amount to over 25 years worth of the 2008 oil and gas amounts.
According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.
This is a very arbitrary calculation that seeks to look at the costs of making an incremental capital investment, and is hardly a description of the tax rate paid by the industry on its profits. Under this same study, homeowners are said to face negative tax rates. Try telling a hardworking homeowner who pays taxes that he really is facing a negative tax rate.
And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits. These companies’ returns on those investments are often higher after taxes than before.
Again, the same highly artificial calculation.
“The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant,” said Senator Robert Menendez, Democrat of New Jersey, who has worked alongside the Obama administration on a bill that would cut $20 billion in oil industry tax breaks over the next decade. “There is no reason for these corporations to shortchange the American taxpayer.”
These companies are hardly "shortchanging" the American taxpayer, and the Senator knows better. The amount of taxes paid by oil and gas companies is staggering, and as noted above, the so-called "subsidies" are far from special subsidies at all. This is simply a way of using language to disguise what is a simple tax increase on the domestic oil and gas industry, one of the few industries that, even through the recession, has contributed large amounts of revenue to the federal, state, and local governments.
Oil industry officials say that the tax breaks, which average about $4 billion a year according to various government reports, are a bargain for taxpayers. By helping producers weather market fluctuations and invest in technology, tax incentives are supporting an industry that the officials say provides 9.2 million jobs.
"Tax breaks" is hardly how oil industry officials would describe these rules. But it is clear that increasing the costs of doing business in the United States by raising the tax rates on the industry will not help maintain or increase job growth--quite the opposite.
The American Petroleum Institute, an industry advocacy group, argues that even with subsidies, oil producers paid or incurred $280 billion in American income taxes from 2006 to 2008, and pay a higher percentage of their earnings in taxes than most other American corporations.
As oil continues to spread across the Gulf of Mexico, however, the industry is being forced to defend tax breaks that some say are being abused or are outdated.
The Senate Finance Committee on Wednesday announced that it was investigating whether Transocean had exploited tax laws by moving overseas to avoid paying taxes in the United States. Efforts to curtail the tax breaks are likely to face fierce opposition in Congress; the oil and natural gas industry has spent $340 million on lobbyists since 2008, according to the nonpartisan Center for Responsive Politics, which monitors political spending.
Jack N. Gerard, president of the American Petroleum Institute, warns that any cut in subsidies will cost jobs.
“These companies evaluate costs, risks and opportunities across the globe,” he said. “So if the U.S. makes changes in the tax code that discourage drilling in gulf waters, they will go elsewhere and take their jobs with them.”
But some government watchdog groups say that only the industry’s political muscle is preserving the tax breaks. An economist for the Treasury Department said in 2009 that a study had found that oil prices and potential profits were so high that eliminating the subsidies would decrease American output by less than half of one percent.
“We’re giving tax breaks to highly profitable companies to do what they would be doing anyway,” said Sima J. Gandhi, a policy analyst at the Center for American Progress, a liberal research organization. “That’s not an incentive; that’s a giveaway.”
Other industries, in fact, based on profit margin per sales dollar, are far more profitable than the oil and gas industry, but the even more advantageous treatment they receive under the tax code is conveniently ignored. Under this analysis, allowing a tax deduction to any profitable company for its costs a "giveaway", but in fact, under an income tax the costs of earning income have to be "deductible". Calling deductions "tax breaks" is just wrong. Calling the oil and gas provisions "tax breaks", or giveaways, when if anything they are more restrictive than for any other industry, is also wrong.
Some of the tax breaks date back nearly a century, when they were intended to encourage exploration in an era of rudimentary technology, when costly investments frequently produced only dry holes. Because of one lingering provision from the Tariff Act of 1913, many small and midsize oil companies based in the United States can claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights.
This is the percentage depletion deduction described above--which is more limited for the oil and gas industry than any other mineral producing activity.
Other tax breaks were born of international politics. In an attempt to deter Soviet influence in the Middle East in the 1950s, the State Department backed a Saudi Arabian accounting maneuver that reclassified the royalties charged by foreign governments to American oil drillers. Saudi Arabia and others began to treat some of the royalties as taxes, which entitled the companies to subtract those payments from their American tax bills. Despite repeated attempts to forbid this accounting practice, companies continue to deduct the payments. The Treasury Department estimates that it will cost $8.2 billion over the next decade.
This may be the most disingenuous claim of all. Under rules in place for over 25 years, again the most severe and substantial restrictions and limitations apply to the oil and gas industry in determining the US taxation of income earned outside the country. As noted above, the US has a worldwide tax system and taxes the income earned outside its borders. But under that system, it recognizes that it should not impose full taxation on such foreign income because that would amount to full double taxation. Thus, the US permits an offset for the US taxes otherwise due--only on foreign income--for income taxes already paid on that income to foreign countries. The tax rules only allow an offset for income taxes paid and, contrary to the assertion above, the tax rules forbid the claiming of an offset credit for a royalty. Further, and most restrictive of all, the tax rules place the entire burden of proof on the taxpayer to show that no portion of what it claims as an income tax offset is in fact a royalty. The taxpayer must overcome this burden by ultimately proving that up in an American court. The Obama Administration would deny US taxpayers in this situation the right to go to an American court to get a fair and neutral determination. In other words, even where a taxpayer can meet the already highly restrictive rules and overcome the burden of proof, to the satisfaction of an American judge, the Obama Administration would deny that opportunity. Rather than saying that the current rules will "cost $8.2 billion over the next decade", it is more appropriate to say that the Obama Administration wants to simply raise $8.2 billion more from the oil and gas industry, on income earned outside its borders, on which in most cases an income tax burden approaching 50% has already been paid. This is a pure and simple money grab, and it denies access to the judicial system to an American taxpayer who believes the IRS has made a mistake. That is a denial of a fundamental right, done under the "guise" of eliminating a "tax break" to one taxpayer. The real question is why the Obama Administration and Senator Menendez are afraid of allowing a US court to review the actual facts, particularly given their call for transparency, and how denying the right to an independent review is consistent with sound tax policy. If the Administration can deny this right of access to the justice system for one taxpayer, what will prevent it from doing so for others whenever they may be out of current favor?
Finally, and perhaps most ironically, changing these rules as proposed will actually reward the major foreign competitors of US based companies in the key, strategic world energy markets, including companies based in China, Russia, and even in Great Britain or other European countries.
Over the last 10 years, oil companies have also been aggressive in using foreign tax havens. Many rigs, like Deepwater Horizon, are registered in Panama or in the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations. American producers have also aggressively exploited the tax code by opening small offices in low-tax countries. A recent study by Martin A. Sullivan, an economist for the trade publication Tax Analysts, found that the five oil drilling companies that had undergone these “corporate inversions” had saved themselves a total of $4 billion in taxes since 1999.
They have not likely saved this tax on their activities conducted in the United States, but they have avoided being taxed by the US on their non-US income, in order to compete with companies headquartered in other countries. The punitive US tax laws applicable to taxation of non-US income have forced these companies to leave in order to survive. The idea of making such punitive rules even more punitive, in the face of what they force companies to do to survive, hardly seems the right strategy if we are trying to promote investment and jobs in the United States.
Transocean — which has approximately 18,000 employees worldwide, including 1,300 in Houston and about a dozen in Zug, Switzerland — has saved $1.8 billion in taxes since moving overseas in 1999, the study found.
Just considering the proportion of employees of Transocean outside the US, and the fact noted in the following paragraph that almost 90% of its work is outside the United States, simply underscores that in order to compete for that work against companies headquartered in other countries, Transocean determined, for its own survival, that it had to leave. A tax system that creates that imperative is hardly in America's best interests, and additional tax proposals that make current rules even more harmful will be counterproductive in the long run.
Transocean said it had paid more than $300 million in taxes so far for 2009, and that its move reflected its global scope, with only 15 of its 139 rigs located in the United States. “Transocean is truly a global company,” it said in a statement.
Despite the public anger at the gulf spill, it is far from certain that Congress will eliminate the tax breaks. As recently as 2005, when windfall profits for energy companies prompted even President George W. Bush — a former Texas oilman himself — to publicly call for an end to incentives, the energy bill he and Congress enacted still included $2.6 billion in oil subsidies. In 2007, after Democrats took control of Congress, a move to end the tax breaks failed.
This is again one of the pure fallacies. According to a Congressional Research Service report (CRS Report for Congress, December 20, 2006), the Energy Act of 2005 actually increased taxes on the oil and gas industry, including the refining industry, by over $1.3 billion; the comment above takes one piece of the bill that was a benefit, without looking at the other parts of the bill that were tax increases. And one of the few beneficial aspects of the 2005 bill was repealed in 2007 and 2008.
Mr. Menendez said he believed the Gulf spill was devastating enough to spur Congress into action. But one notable omission in his bill shows the vast economic reach of the industry. While the legislation would cut many incentives over the next decade, it would not touch the tax breaks for oil refineries, many of which have operations and employees in his home state, New Jersey.
This sounds suspiciously like the health care bill with the special "cornhusker kickback".
Mr. Menendez’s aides said the senator thought it was legitimate to allow refineries to continue claiming a manufacturing tax credit that he wants to eliminate for drillers because refining is a manufacturing business and because refineries do not benefit from high oil prices. Mr. Menendez did not consult with New Jersey refineries when writing the bill, his aides said.
In the wake of bad approval ratings and tough news about a slow economic recovery, President Obama’s team has started to fight back against accusations that the President is anti-business. President Obama focused on the stimulus to highlight his pro-growth agenda during a recent speech in Nevada. Back in Washington, the President’s advisors responded to press inquiries by citing Obama’s frequent visits with corporate leaders as evidence of the President’s positive relationship with the business community.