So Democrats have discovered a new way to stem out-of-control federal spending: “End Big Oil subsidies now!” The position isn’t exactly courageous. Nor is it exactly honest.
This week, the Washington Post reported that the Senate Democrats’ new tax agenda “is focused on ending subsidies for big oil companies,” allowing voters to direct some of that populist rage over gas prices where it belongs: Republicans. By raising the issue, Democrats hope to put the GOP in the uncomfortable position of defending “some of the world’s most profitable corporations, including Exxon Mobil, Shell, BP, Chevron, and ConocoPhillips.”
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In truth, these oil giants are taking advantage of features of the U.S. tax code that are available to most corporations, and of a broad tax break that exists to encourage investments in the manufacturing sector. Even if we accept that these are “subsidies,” we can take comfort in knowing that Washington will periodically incentivize industries that produce something rather than paying them to produce nothing — as is the case with some farmers and nearly all clean-energy outfits. Further, the industry still pays an effective tax rate of 48.4 percent, compared with 28.1 percent for all other S&P Industrials, according to economist Mark J. Perry.
And some of us, believe it or not, aren’t completely grossed out by the notion of profit — even a lot of profit. Strong earnings are good news not only for those dastardly Oil Barons, but for the millions of people who depend on the industry for their employment, as well as the vast number of Americans who rely on investments in oil to bolster their pension funds, retirement funds, college funds, and so on.
An industry as useful, wide-ranging, and essential to the economy as fossil fuel is inevitably going to entail talk of “billions.” Oil corporations are indeed “highly” profitable, averaging around a 7–8 percent profit margin the past few years — but they’re less profitable than government, which hauls in a higher margin on, for example, gas taxes.
How much would Harry Reid and friends save Americans by ending these tax perks? In five years, an estimated $18 billion. To put this savings in perspective (and we’ll get back to how president Barack Obama would like to spend . . . er, “invest” this money), the federal government borrows around $28 billion every week. To make this kind of trivial savings the focus of a high-profile plan to is to engage in transparently political gotchas.
Sen. Claire McCaskill, one of the sponsors of the “Close Big Oil Tax Loopholes Act” in the Senate, says: “We’re going to face a lot of resistance when we try to take a few billion dollars in free taxpayer money away from them.” As is typical of the Left, McCaskill seems to believe that giving a company tax breaks is tantamount to giving that company taxpayer money. But who exactly does she believe is going to pay for a tax increase, anyway, if not consumers?
Granted, Republicans would do well to support removing — across the board — tax incentives that skew competition. Eliminating these subsidies is the consistent free-market position. And $18 billion is $18 billion — if it’s used to alleviate the debt crisis.
But it won’t be. Obama would rather divert “those dollars to invest in clean energy to reduce our dependence on foreign oil.” In other words, Obama plans to reroute the money to a clean-energy market that not only is already massively subsidized, but has increased the cost of power.
So, in the end, this ruse has nothing to do with savings, nothing to do with bringing down the price of gas, and everything to do with casting government as moral arbiter of energy.
— Syndicated columnist David Harsanyi blogs at The Blaze. Follow him on Twitter here.
Republicans really should pounce on this and come back with a broad range of "subsidies" to end, not least of which would be all the ones for "green" energy (a code phrase I dislike almost as much as "diversity"). I am not in favor of increasing taxes at all, but the narrative has to change.
I'm glad that there was at least one paragraph indicating that Republicans should actually take this position, although it's kinda hard to blast the Democrats for being dishonest while doing so, especially when you don't have the Media on your side...
So is the 2 billion or so per year being "taken away" from the oil companies related to the 2 billion Obama lent to Petrobras? Does he consider Brazilian oil to be, somehow, not foreign? Because he told them the United States wants to be a major customer for them.
Maybe it's just a whole pack of lies used to justify class warfare. But maybe the question should not be whether to end a specific subsidy, but whether the government should subsidize any industry. Should there be caps on the amount of subsidy? If "too much" profit is bad, what should the limits be?
Instead of talking about billions in profit, companies should be viewed as one investment option and compared with others in terms of ROI (return on investment). If oil companies become unprofitable, the money might well move to something else. I don't know if you can invest 100 billion dollars in a CD at some level of interest, but if it is possible and pays better than running an oil company, why not do it?
I wrote to my congressman and asked that he support efforts to repeal the $0.45/gallon Volumetric Ethanol Excise Tax Credit, the blenders tax credit. The blenders tax credit takes about 6 billion dollars from taxpayers and gives it to oil companies so that they will use ethanol in gasoline. That's the first "subsidy for Big Oil" I would eliminate.
I don't understand how Democrats expect to bring down the deficit when all their cost-cutting efforts are "balanced" with "investing" in pet projects. It's ridiculous.
That being said, I don't understand how it is that a company/industry can justify fighting for continued preferential treatment while their coffers are overflowing.
And, how is it that the government is still subsidizing farmers and airlines and non-profs (among others)? Aren't we unfairly catering to them while turning our backs on the small business owners?
Finally, as far as the platforms are concerned, the Republicans ARE raising the deficit - every time they defend these tax incentives, breaks, credits, etc. for big business and homeowners alike. Giving out these tax breaks increases our deficit by taking away any revenues that would have been collected. Neither the Republicans nor the Democrats deserve to be in office. JMHO
If "Big Oil" made as obscene profits as they're credited with in politics and media, Wall Street would be unable to garner one shiny dime for any other investment. Every investor would invest his capital in the one "sure thing". All the Microsofts, Apples, and Verizons would go wanting for lack of a single shareholder.
Jon: The problem is that most people don't understand the difference between absolute profit and return on investment.
Yes, the oil companies combined made a huge amount of money both last year and last quarter. On the other hand, just think about how many billions of gallons they sold last year. Divide those profits by the number of gallons sold, and you find out they only made a couple of pennies per gallon in profit.
The beauty of capitalism is that whenever one sector starts making outsized profits. Every greedy little so and so who has two cents to rub together runs to jump into the same line of work, so that they too can make obscene profits. The result of which is an increase in supply, driving down prices and profits, until those profits are back in line with what other businesses are earning. (The only time this fails is when govt makes it hard or impossible for new players to enter a market.)
Every Democrat position these days seems to boil down to simple demagoguery.
Though I agree we should end any "oil subsidies" if they exist -- as well as all ethanol and "renewable energy" subsidies, which are much more damaging.
Let the markets work the way they are supposed to and "green" (ie middle ages technology -- windmills and burning wood chips!) will mostly disappear. And that would be a GOOD thing.
So typical of government - If it lives, tax it (the oil companies); if it's dead, subsidize it (green energy). Then the wonder is, why is the economy not growing as fast as it should?
The real culprit here are the enviornmentalists. They have precluded drilling in the oceans off the coasts, and they have precluded further drilling in Alaska. Somehow Democrats never put together the effect of their environmental policies on the economy. (But that is not the only thing about which they are willfully blind.) Then, of course, there is POTUS. His unwillingness to increase drilling licenses in the Gulf have no doubt had some effect on oil prices. Why isn't Congress grilling him about his policies?
Did Mike B. not understand that the "breaks" are available as depreciation to most other industries, or does he just squeak 'oil depletion allowance' on this site once a day?
I don't take issue with any of Mr. Harsanyi's points, but these "subsidies" are a winning political argument for the left, and I don't see any use in dying on this hill. Take away this talking point and what does the left have?
Yes, by removing these "subsidies" (that the Ds approved, BTW) it is in affect a new stealth tax. However, a corresponding reduction in the tax code that offsets these targeted deductions could be made to make all of these tax changes revenue-neutral, which would result in simplify the tax code, making it more fair and freer of distortions.
BTW, it is a losing position if you choose to play the left's game of imprecise and misleading nomenclature. They have purposely chosen the word "subsidy" when the proper word is "deduction" or "depreciation allowance." The government is not paying Big, Bad Oil to drill, but that is the impression you give when you use their Newspeak. George Orwell would be proud.
@MikeB: "Who besides oil companies can take advantage of the oil depletion allowance?"
I suppose that only oil companies are subject to "oil depletion," but the concept of percentage depletion (with favorable tax treatment) applies to all firms in the business of extracting wasting natural resources, including mining, quarrying, even certain geothermal energy projects.
Exxon recently reported profits of $7.56 billion last quarter.
If there are 100 million cars driving in the USA that each consume 10 gallons a week, that's 52 billion gallons of gas a year, or 13 billion gallons per quarter.
Let's pretend that Exxon is the only seller of gasoline, and that there really is that much gas sold -- ny estimate is probably high by a factor of between 2 and 4 times.
13 billion gallons divided by $7.56 billion is 58 cents / gallon profit.
But the real number, split 4 ways is more like $2.32 / gallon. Coincidentally, almost the exact amount gas prices have risen in the past 3 years.
@fijiaaron - your numbers and concepts are off a bit. Conceptually, you should be looking at all motor vehicles, and secondly, you need to take into account Exxon's share of the market, but I will for purposes here accept your assumption that Exxon account for 25% of the market.
Your assumption about motor vehicle is off by a factor of two and your derivation of gasoline used is off by a factor of 3. To cut matters short, we know that in 2008, the total amount of motor fuel used was on average about 42 billion gallons per quarter. Assuming about the same amount is being used currently, then Exxon's profit (assuming a 25% share) is about 71 cents a gallon, not $2.32.
fijiaaron:
First, if you had looked at Exxon's 10-Q you would have noticed that Exxon is a much larger company then you give them credit for, and has several markets that it sells its products. Consumer gasoline is just one of its products. They had over $109 billion is sales in the first quarter, and this was not all concentrated in gasoline sales.
Second, if you suggest that Exxon can sell its gasoline with a 200% mark-up then you are living in a world that only a leftist could believe. Exxon would be out of the gasoline business tomorrow if they tried to compete with a mark-up as great as that. No oil company can expect to receive 2 pennies profit for every 1 penny in expenses and stay in business for long unless they had either established a market monopoly or there is massive and pervasive collusion*, neither of which is evident. You may want to review your math and submit a retraction.
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[*] There are other highly improbable scenarios, such as economies of scale, or productivity advances limited to just Exxon and enjoyed by none of its competitors. These were ignored since these are highly unlikely events and thus barely worth mentioning.
Integrated oil companies make most of their money selling oil and natural gas, not motor gasoline. ExxonMobil's reported actual profit on gasoline averages $.02 (two cents) per gallon. The government take via taxes is more like $.50 per gallon.
Can you provide me with the website or literature that shows how oil companies make only $.02/pg on auto fuel and, more importantly, the profits they make off of other products? Thanks.
I'm sorry I can't remember the gentleman's name, but I recently read comments from an industry insider and Obama supporter that he was worried about the president's credibility on this issue as the oil depletion allowance has not been available to Big Oil for the last 30 years after Congress changed the law. Only the small independent producers are eligible for this deduction.
Therefore, by eliminating this "subsidy" not only will the government not be getting its "fair share" of revenues from Big Oil, the small producers will be less able to compete and prices will increase for the consumer. Obama's Big Government is Big Business' best friend.
Republicans, NRO and Mr. Harsanyi should make this clear. We're about eliminating all corporate welfare and increasing free enterprise and fair competition. The Democrats - not so much.
