Last Wednesday, after Senate Democrats proposed a targeted tax increase on oil companies, former Governor Tim Kaine said to the Washington Post, “We ought to be getting rid of tax subsidies to oil companies.”
Interestingly enough, Senator Mary Landrieu of Louisiana, a fellow Democrat, called this legislation “laughable.”
So what are these subsidies Democrats speak of? One is the manufacturing deduction from Section 199 of the tax code, which accounts for intangible drilling and development costs and percentage depletion.
Last week, I had the chance to hear from Jaime Spellings, ExxonMobil’s general tax council who said:
“If you look at the structure of 199, it has a general provision that applies to all manufacturing, including farming, mining, fishing, video game development, Hollywood movie production….There is a provision much later in the details of Section 199 that – for oil and gas only – it actually reduces the value of the manufacturing deduction by a third. So if everyone else gets a 9-percent manufacturing deduction, we get a 6-percent manufacturing deduction.”
In other words, the oil and natural gas industry are already operating at a disadvantage in the tax code compared to their peers.
The other “subsidy” – or in normal human parlance, “deduction” – is “intangible drilling and development costs.” Something that has been in existence since 1914.
This is simply being able to deduct the intangible expenses or costs, such as wages and salary. And is something every business does – and can do – except big oil.
“Large, integrated producers have to capitalize 30 percent of their intangible drilling and development costs. So once again, you have a rule of general application. And, then, for a subset of large companies, you have a less-favorable treatment. So we have to capitalize it and recover it over 60 months,” continued Spellings.
I could go on, but it should come as no surpise that for every gallon of gasoline we purchase, approximately 13% of it already goes to the government and a paltry 2-to-7 cents is profit to the oil companies. And now the government, and Tim Kaine, want even more?
So, it should come as no surprise that Kaine’s GOP opponents, Radtke and Allen, jumped all over him for this.
Additionally, what has yet to be reported, is E.W. Jackson, also a candidate for the Republican nomination for U.S. Senate from Virginia in 2012, took Kaine to task:
“Tim Kaine…is completely mistaken when he claims that high oil prices are a result of oil subsidies. The reason gas prices are high is because the Obama Administration has no energy independence plan, seeks to stifle oil production and coal mining at every chance, and is pursuing pointless missions in the Middle East. The oil industry is simply a convenient scapegoat for the Obama Administration’s failure to offer a real solution to our nation’s energy crisis.”
However, earlier this week, President Obama did finally succumb to mounting pressure on him to acutally do something, and announce that he would expedite exploration for oil and natural gas in the mid-Atlantic.
And, today, Senate Republicans introduced the Offshore Production and Safety Act of 2011.
According to a release by Governor Bob McDonnell, the act “aims to increase domestic offshore energy production, including in areas off the coast of Virginia, improve safety and require bureaucrats to process permits more efficiently.”
The governor, who has repeatedly called for moving towards energy independence and developing Virginia’s resources in the Outer Continental Shelf said:
“[The president’s] remarks this weekend demonstrate that the administration is increasingly focused on this matter, and is considering steps to help address this pivotal issue. At the same time, I am pleased that Republicans in the U.S. Senate under the leadership of Senate Republican Leader Mitch McConnell have stepped up and offered this important legislation to move us one step closer to responsible domestic energy exploration off our shores, while ending bureaucratic delays to the efficient processing of existing drilling permits.
Will there be bipartisan support for this bill? The governor certainly hopes so. But will Senators Jim Webb and Mark Warner also join the cause?
According to Kevin Hall, Warner spokesman:
“Senator Warner supports expanded domestic energy production, including off of Virginia’s coast. Right now we’re looking at Sen. McConnell’s proposal to see what provision, if any, it might make for incorporating lessons we may have learned from the Gulf oil spill. Sen. Warner also believes any drilling off of Virginia’s coast should include revenue sharing.”
Fair points, and worthy of further discussion, and perhaps even amendment, should those provisions not be in the bill, but at least it’s a discussion starting from common ground – expand energy production.
Regardless, this is not a time to stifle energy production with higher taxes, further hurting consumers in a wide variety of ways. This is something many smart people, regardless of party, understand.
Someone forgot to give Tim Kaine the memo.
