Here is Jim Mulva’s testimony.
Here is John Watson’s testimony.
I’ve now provided the testimony from the CEOs of the three largest U.S. oil companies. The primary message, whether a person would believe it or not, is that they say they are not subsidized.
Sorry, but it’s a subsidy. It’s a specific provision in the tax code that benefits one industry. Saying other industries get subsidies isn’t a response. Each piece of tax policy should stand or fall on its own merits. You’re complaining about a politician using rhetoric.
Ending a tax subsidy is increasing taxes - nobody is fooled by that rhetoric, not even stupid Democrats. They just happen to believe that increasing taxes on these particular companies is a good idea.
Agreed on the point that depreciation schedules are stupidly complicated. It’s ridiculous. I’m all for tax simplification and standardization. By my definition every one of those items is a subsidy. Perhaps that makes the word itself meaningless, I honestly don’t know. I happen to think this is one of those situations where an outsider has more clarity of vision than an insider. To someone who knows the tax code inside out having specific depreciation rules for each industry makes sense. To a layperson it’s idiotic, wasteful, and outrageous.
I have no idea other than that the tax rules make it so. We can talk about Tech and Pharma tax policy in another thread if you’d like - I have no doubt they have worked sweetheart tax subsidy deals as well.
Yes, I read all three. I particularly liked Jim Mulva citing world-wide tax rates as a reason US taxes shouldn’t be raised.
I specifically cited them to point out that they consider the IDC a tax benefit to the industry. Here is the quote from John Watson:
He claims they are similar to pharma and tech deductions, which is fine, but doesn’t negate the fact that they are tax subsidies.
Dude, the Heritage Foundation is about as far removed from the Democrats as you can possibly get. They even receive a shitload of their money from the Koch brothers, who know a thing or two (or three) about the oil industry. As I pointed out earlier, THEY consider them subsidies. Are they engaging in dishonest tactics, and if so, for what reason?
Why is that inflammatory? I don’t think anyone believes that farmers are immune from tax burdens, even though many of them get subsidies. It’s quite possible for people and companies to both pay taxes and still receive checks from the government. It’s also quite common. It’s true of me just about every year.
Quoting you out of order.
No offense, but I think you came in to this topic a little misinformed. Simply put, to achieve your goal of simplification of the tax code on this issue, there is only one solution: expense all costs. I don’t believe we should do that, but it would be the only way to avoid the complication of the tax code on this issue of expensing versus capitalizing (and then how to capitalize). I honestly see no other alternative.
By extension then, the only possible thing to use as the baseline for comparison purposes is expensing. Of course that would make your definition that all variances from the baseline being a subsidy a ludicrous statement as the variances would be capitalizing. This is ludicrous clearly as it is a penalty from a tax standpoint.
I’m not saying it isn’t subsidy because other industries get subsidies. I’m saying it’s not a subsidy because every single other industry is treated exactly the same. Every single industry has to deal with the complicated ideas of what should be capitalized and what should be expensed and then how should it be capitalized. If everyone has the same item then you can’t point to one industry and say that same item is a subsidy; it’s not, it’s just the normal tax policy of the nation.
You’re right with this statement. Unfortunately, that’s not how you are acting. You are acting as if there is some Platonic Universal that exists equal to the tax on a normal company, and every company that doesn’t fit that is subsidized. The problem is that there is no normal company. The tax code, to achieve the same basic effect, must be tailored specifically to each set of circumstances. There is then no way of achieving pure equality in the eyes of everyone as the circumstances that each industry of company has are so varied.
This particular rhetoric is not technically true, is generally misleading, and is designed to generate populist anger. It is also designed to put the opponent in an indefensible position. It is nearly the equivalent of asking “yes or no, have you stopped beating your wife.” It is the worst type of politics.
If nobody is fooled, then why did they change their message from a windfall profits tax to ending a subsidy? I believe they do think people are fooled by that as your average person doesn’t understand the tax code.
I would say uninformed, perhaps. But I’ve read a lot since then, and still maintain that McCaskill is not lying.
Well, there is certainly many, many alternatives. One was proposed in the bill the Senate voted on. Why can’t we dramatically simplify the capitalization table? Why are the only options industry-specific capital depreciation or expensing everything? Was Reagan full of shit when he proposed removing the IDC rules as part of his 1984 tax reform? Kennedy when he fought against them?
But when one industry (or even a few, if pharma and some tech companies fall in this group) benefits from the way their industry is treated then it is a subsidy. Just because everybody has slightly different rules doesn’t mean that favorable rules for one group isn’t a subsidy.
I disagree. We’ll probably just have to leave it at that. The oil industry has unique rules that benefit them. In particular it lets them achieve very high returns on capital invested, which they then tout to investors. These rules are vigorously defended by the industry and by their allies. Calling them out on it may be populist, but it isn’t misleading.
Because windfall profits taxes are stupid, and the public knew it and didn’t support them? But reviewing tax subsidies from 1916 is probably a decent idea, so framing the debate that way is good politics?
Honest question, did you even read the Heritage article you posted? If so, do you feel like you have a good understanding of what was said? I don’t mean that in an insulting way; I feel like they made the point that the oil companies aren’t subsidized pretty effectively. In other words, they are on the same page as me.
[QUOTE=Heritage Foundation]
In many cases, what the President and anti-oil crusaders label an oil subsidy is neither a subsidy nor a tax treatment specific to the oil and gas industry. These are broad tax policies that apply to many industries. When the Administration takes aim at these provisions specifically in the oil and gas industry, it is essentially a targeted tax hike.
[/QUOTE]
They also state things they do consider subsidies related to oil.
[QUOTE=Heritage Foundation]
Government R&D. The Department of Energy (DOE) has spent taxpayer dollars on oil research and development, including funding for unconventional oil, gas, and coal. Although President Obama’s FY 2012 budget request significantly cuts funding for the Office of Fossil Energy, decreasing its size by $417.8 million below the FY 2010 appropriation, it does not go far enough. The only funding in this area should maintain the Strategic Petroleum Reserve, for which the President’s budget requests an appropriate $121.7 million. Eliminating all other fossil energy funding would save $399 million.
[/QUOTE]
Okay, so it is a subsidy to the oil industry to create the Strategic Petroleum Reserve and to research stuff. Sure, I’ll buy that as the government purchasing oil increases the price of oil and the government research can be used by companies in the future. Is this really a subsidy for oil companies individually though or is it more of an indirect subsidy like the government creating the federal highway system? Is this really the type of stuff that Democrats want to end? Is this sending a check to the oil companies?
[QUOTE=Heritage Foundation]
Enhanced Oil Recovery (EOR) Tax Credit. Oil producers receive a 15 percent tax credit for costlier methods and technologies, such as injecting liquids and carbon dioxide into the earth. Many EOR processes are no longer in use, and the tax credit applies only when the price of oil falls below a certain level.
[/QUOTE]
End something that isn’t in use. Sure, back when it was in use, it was a subsidy. Eliminate it from the tax code, and watch the extra revenue pour in. Is this sending a check to the oil companies?
[QUOTE=Heritage Foundation]
Marginal Well Production Credit. Marginal wells produce 15 or fewer barrels of oil per day, produce heavy oil, or produce mostly water and fewer than 25 barrels of oil per day. The marginal well production credit is another safety-net tax provision. This is another preferential tax credit that Congress should repeal.
[/QUOTE]
This effects very small companies. Exxon isn’t making their billions off of stripper wells.
They then talk about some other items that should be looked at.
[QUOTE=Heritage Foundation]
Percentage Depletion Allowance. A depletion allowance is analogous to depreciation and is appropriate when the quantity of the potential resource is unknown, such as the amount of recoverable oil from a well. Independent oil and gas producers use a depletion allowance to recover capital investments over time. This is also available to producers involved in mining, timber, geothermal steam, and other natural deposits. The depletion allowance for independent oil and gas producers is 15 percent of the producer’s gross income from its average daily production, up to 1,000 barrels of oil. While there is nothing wrong with percentage depletion in theory, the question is whether at 15 percent it is overly generous or, possibly, not generous enough and should be raised. Congress should have an independent organization determine this.
[/QUOTE]
We already talked about this. It doesn’t affect larger companies. This affects individuals and very small companies. I agree it is a subsidy. It doesn’t subsidize the larger oil companies though.
[QUOTE=Heritage Foundation]
Exemption from Passive Loss Limitation. Passive activities occur when a landowner collects income or incurs losses without physically participating in activity on his land. For example, someone could own farmland but not operate the equipment or plant the crops. In oil and gas operations, passive activities include the cost of development and the operation of the property. Typically, taxpayers can deduct passive activity losses only against passive activity income; however, taxpayers with working interests in oil and gas are exempt from the passive loss limitation rules, allowing losses incurred from exploration in oil to offset non-oil income. Congress should repeal all passive loss limitation exemptions.
[/QUOTE]
This relates primarily to drilling partnerships.
Then they hit the big topic we have been discussing.
[QUOTE=Heritage Foundation]
Immediate Expensing Should Be Complete and Permanent
Another non-subsidy target of the Administration is oil companies’ ability to expense capital costs in the year of the purchases.
Immediate expensing allows companies to deduct the cost of capital purchases at the time they occur rather than deducting that cost over many years based on cumbersome depreciation schedules. Expensing is the proper treatment of capital expenditures. Depreciation raises the cost of capital and discourages companies from hiring new workers and increasing wages for existing employees. Immediate expensing for all new plant and equipment costs—for any industry or type of equipment—would allow newer equipment to come online faster, which would improve energy efficiency and overall economic efficiency.
Even President Obama has championed temporary 100 percent expensing for qualified capital because it lowers the cost of investment.[2] Congress should make immediate expensing permanently available for all business investments.
All companies, including oil and gas companies, should be able to expense their full capital costs immediately. Until that critical change in the tax code is made for all businesses, Congress should retain all provisions that move the tax code in the direction of expensing.
[/QUOTE]
In other words, they not only believe in expensing IDCs, they want to expense everything.
Now, what do you think this article says?
You still have to determine what is capitalized and what is expensed? Simplifying the capitalization table doesn’t do anything to address the most difficult part of the process. How do you write a tax code that is simple, non-industry specific and would result in IDCs being capitalized (like it seems you want to do and think the alternative is a subsidy) but those same types of activities being done unrelated to the drilling of an oil well being expensed? You can’t seriously want wages or fuel costs, for example, to be capitalized when you’re not talking about drilling a well, right?
These rules they have aren’t unique. They are comparable to all other industries. The industry doesn’t receive very high returns on capital invested. Good companies do, and bad companies don’t. The industry overall is pretty much just like all other industries from a profitability standpoint. It is highly cyclical, so there are periods of high profits and periods of high losses.
Windfall profits taxes are at least honest. Talking about ending subsidies is just using misleading code words when they aren’t really subsidies.
It’s inflammatory because they don’t really get a payment (check or electronic or otherwise) from the government. What they are really saying is that we want to increase their taxes and we are going to change the way the tax code is written in order to specifically target these specific companies in this specific industry.
Also, they have clearly been effective on you as you seem to be comparing these so-called oil subsidies to farm subsidies. Farms receive direct payments from the federal government. They are subsidized in every sense of the word. Oil companies do not receive payments from the government. There are provisions in the tax code that some people think does not tax them enough. Those are completely different things.
Oh, please let this sort of bill pass! As a Canadian I would be eternally grateful as you would help our economy greatly. The current conservative government in Alberta changed the royalty rates for oil companies a few years ago to collect more taxes. So, the companies had to pay it right? If they wanted to drill, they had to pay? Well they did continue to drill only it was in Saskatchewan and British Columbia.
I’m sure (frankly, I can guarantee it) the top 5 oil companies in the world will continue to drill. Only it will be in places like Canada and other locations who are not so short sighted as to try and strangle the golden goose.
Interesting, Uzi. I’ve been reading up on Canada’s tax structure for oil exploration and production. It doesn’t seem to be nearly as generous as the US is, but maybe I’m reading it wrong.
Can you provide a cite about the change Alberta made and how it affected oil company behavior?
I did read it. I don’t agree with much of it, as I find it incredibly biased, but instead used it as an example that not everyone claiming that there are oil subsidies out there is a leftist wing nut Democrat.
I think they are incorrect, especially in regards to Section 199. I don’t care how many industries are covered by it, it’s still a subsidy. A tax break for domestic manufacturing and infrastructure is a subsidy, designed to drive domestic manufacturing and infrastructure creation. As for the dual-capacity taxpayer issue, I’ll buy that it isn’t a subsidy in theory, although it is extremely rife for abuse by the largest of companies (the sort that are large enough to persuade foreign governments to receive royalties in “creative” manners). We can debate whether that has already happened or not (and/or is still happening, i.e. PRT), but I’m not going to start picking on Exxon as it isn’t really related to subsidies.
You’re the one who keeps going back and forth over whether they are subsidized or not. So, are you conceding that they are, even if only narrowly, in your opinion?
Cite that it isn’t in use?
Regarding the article, there are many points we can debate if you wish, but again, the point was simply that there are even people who side with the industry that claim there are subsidies involved. Hell, Hofmeister even acknowledges it.
Why does it matter if it is a check or tax credits?
I didn’t compare them, and not that it matters, but not all agricultural subsides are direct payments. I used the farm subsidies argument as a rebuttal to your claim that:
[QUOTE=LonghornDave]
That is inflammatory as it is clearly meant to imply that oil companies are making money and are not paying taxes but instead receiving funds from the government.
[/QUOTE]
Oil companies are making enormous profits. They are setting quarterly records. There is no reason they should receive tax money or tax breaks on top of that, unless they own our politicians. They do.
This prompted the change in 2007:
Another article on why they are changing the rates back:
http://www.internationallawoffice.com/newsletters/detail.aspx?g=334b6b18-2c8b-4cc9-a002-283f8f4aef00
Another on the decreases:
http://www.cbc.ca/news/canada/edmonton/story/2010/03/11/alberta-royalty-changes.html
While it sounds good to stick it to the companies, people have some sort of blind spot that stops them from seeing the competition from around the world. Labour costs are cheaper in Asia, so companies move their operations to produce the crap that Walmart sells there. Jobs are lost at home. But even that takes a while to happen. Oil companies have X amount of dollars to spend, so they will spend it where they will get the most returns. Most of these companies have operations around the world. They can spend their money in the US or in some other location. It doesn’t take long to make that decision especially on optimizing current projects.
For example: Unlike the common perception that oil is found by some yokel with a gun hunting possums and it will just boil out of the ground, producing wells have to be manipulated to maintain production. So, I have to choose what wells will get the most money. If I choose this well I get some return, if I choose that well, I get another result. I look at every well I have wherever it is. Now if the jurisdiction that the first well is in taxes me higher, I might not choose that one even if I do get better results from improving it. I have limited funds, so I’ll choose best place to spend them that gives me the best return today on that money.
So, yeah tax them because they are ‘teh evil’ and make lots of profit. They’ll take a hit in the short term until they can move operations somewhere they don’t get taxed so high, or get the breaks you seem to think they get, and then your ‘revenues’ will plummet. Because those ‘breaks’ are what keeps that company producing your reserves in your location rather than someone else’s.
I guess what I’m saying is that if you remove tax incentives or increase taxes, you had better look at the other places around the world and not price yourself out of competition with them (assuming you want to compete).
Good stuff Uzi, thanks. From what I can tell the royalty rates are still higher than in the US, as is the taxation, so I don’t think that repealing this loopholes would be a problem at all.
It actually touches on one of the other “loopholes” being addressed - the deduction for foreign taxes paid. In the US, companies can deduct foreign taxes paid, but not foreign royalties. It seems that some companies are using this provision to reduce their US tax burden by hiding foreign royalties as taxes and then deducting them. The proposed changes would have removed the dual-capacity terms, and thus made US drilling more attractive.
Are you just looking at comparing jurisdictions within North America? Or around the world? Because the competition is the whole world. Nor does raising rates mean they will stop all operations. They may keep enough to satisfy whatever working arrangements they have to retain the block. Just don’t be surprised if ‘repealing the loopholes’ ends up costing you taxes.
That line of argument leads one to the conclusion that the only correct level of taxation for any international industry is zero.
No, what it means is that taxation in this instance has to be done in a logical manner and not just to appeal to the plebes.