House Democrats plan to force a vote on an amendment today that they claim would cut “subsidies” to “Big Oil.” In reality, their legislation would repeal a domestic manufacturing tax credit available to all maufacturing firms, but only for the five largest oil companies. The measure would do nothing to lower gas prices and would only net $12.5 billion in more taxes over ten years.
This House Democrat oil subsidy cut plan is not to be confused with President Obama’s more ambitious plan to cut oil company tax breaks by $43.6 billion over ten years. Why is the House Democrat plan so much weaker than the Obama plan? Because the Obama plan would give Big Oil a huge win by making their smaller competitors less competitve. Cato’s Jerry Taylor and Peter Van Doren explain:
Another significant tax break allows companies to accelerate the deductions of the costs of labor and various other inputs associated with drilling oil or gas wells. Now, there’s nothing wrong with deducting the cost of doing business from one’s tax bill. In other industries these expenses would be capitalized and deducted over time as income is earned. But in the oil and gas sector, the tax code allows oil and gas firms to deduct 70% of these expenses in the very first year of a well’s operation and the remainder over the next five years. These accelerated deductions are far more valuable to small producers than they are to large producers because the Alternative Minimum Tax for vertically integrated oil companies usually prevents “Big Oil” from using this tax break to its advantage. Still, it will likely cost the treasury $12.4 billion over the next 10 years.
Finally, small oil companies (not, incidentally, “Big Oil” companies) are allowed to deduct a specified percentage of their gross income from the taxes due from producing fields rather than simply deduct the actual costs of the capital investment over time. The subsidy arises when the deductions exceed the actual investment costs. This aspect of the tax code will cost the treasury $11.2 billion over 10 years.
Taylor and Van Doren stress that there is no economic justification for any of these tax breaks, and they are right. But the difference between the White House and the House Democrat bills highlights how difficult it will be for the left to solve their high gas price liabilities be raising taxes on oil companies.