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May 11, 2011

Dems Call GOP Bluff on Oil Subsidies, Deficit

In his 2012 budget plan, President Obama proposed taking tax subsidies away from oil and using the money to subsidize "renewables". Further subsidies for the renewable energy industry would have been relatively easy for Republicans to vote against. But now Democratic Senators Robert Menendez of New Jersey, Sherrod Brown of Ohio, and Claire McCaskill of Missouri have vastly improved the proposal by requiring that all the savings go to deficit reduction. Time to see who's serious about a free market and a balanced budget and who's in the pocket of the oil industry.

Republican Senate leader Mitch McConnell of Kentucky is off to a bad start. He's quoted in a Wall Street Journal story parroting the oil company line that the Democratic proposal would increase fuel prices and make the US more dependent on foreign oil.

Emotionally, the Democrats are using anger at the oil companies who are reporting huge profits in a time when consumers are paying through the pump. Emotionally, Republicans are using the fear of even higher prices. Let's look at the economics.

About a third of the savings comes from eliminating a tax loophole which lets oil companies treat the royalties they pay foreign countries as if they were taxes paid abroad; this allows them to subtract the cost of their raw material directly from their tax bill instead of using the cost to reduce income like other companies do. This is really awful policy when you think about it. It favors foreign oil over domestic oil (because the provision only applies to foreign oil); and it says that when Saudi Arabia, for example, raises the price of crude, the entire increase comes out of the US Treasury; the net earnings of the oil companies are not affected at all.

OK, the oil lobbyists would say, but we would raise prices to cover our "lost" net income.

First, this is pure BS because, like any other company, they raise prices whenever they can. There is a world market for oil and gas and that determines prices, not some mythical return the oil companies would like to have. The prices are set by supply, demand, marginal costs of production, and some speculation. Oil prices have more than doubled in the past couple of years; the tax provision hasn't changed. In the great recession, oil prices plummeted despite no change to the tax provision.

Second, even if it were true (it's not) that we are buying down the price of gas at the pump by giving tax breaks to oil companies, why would we want to do that? Those who use oil ought to pay for it according to their use; the cost shouldn't be socialized across all taxpayers according to ability to pay (or find a good tax accountant). Republicans should know that.

Remember, these are special purpose tax loopholes, wealthfare; they are every bit as much a government expenditure as a welfare check or a grant to a politically correct business. Ending tax giveaways isn't raising taxes.

OK, the oil lobbyists will continue, the bulk of the savings is coming from repealing certain writeoffs for domestic production expense. Don't you want more domestic production?

Sure we do, you should say if you meet one of these oil lobbyists, that's why we repealed the provision favoring foreign oil (see above). Now get to work; you have plenty of "incentive" to drill and explore with oil at $100/barrel. We should, however, open up more of the US for exploration. That is the way to get more domestic supply.

The argument that they need incentives to drill just leads to us canceling those out at taxpayer expense by giving incentive after incentive to both oil companies and their competitors who provide energy from other sources. So wait; there is a way that Republicans can improve this Democratic legislation. They can propose also eliminating competing incentives to "create a level playing field" for the poor oil companies. Let's start with corny ethanol. Pretty soon we'll be saving real dollars; and we'll have a better energy policy, too.

It would be a clutter-cutter if one of the GOP Presidential candidates would make a straight forward pitch for ending all energy subsidies; he or she would have my vote if he or she survives Iowa. Obama, of course, doesn't have to worry about Iowa this time.

Related posts:

"Government Economic Development Program" is an Oxymoron

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Ending Tax Giveaways Isn't Raising Taxes

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