English was not the first language of the great Austrian economist Ludwig von Mises. Hearing his graduate students at New York University repeatedly use the colloquial expression “loopholes,” he asked for an explanation. After the concept had been explained to him, according to his late student Murray Rothbard, the great economist said, “Ah, so a loophole is when they leave you something that’s not taxed.”
Nevada’s state treasurer, Kate Marshall, is currently the Democratic candidate in the special election to fill Nevada’s Second District congressional seat. She visited us for an endorsement interview, a week back.
“Where are you on taxation?” she was asked.
“I’ve been very clear that we need to close the loopholes,” she replied.
We should start, candidate Marshall declared, with those “$100 billion in subsidies to Big Oil.”
I asked if she meant $100 million. She insisted she’d said $100 billion.
It’s a talking point that nearly every Democratic candidate for national office uses, these days, though the stated price tag seems to vary.
But what are these “subsidies,” exactly?
“Which specific government agencies write and send those checks, adding up to $100 billion, to the big oil companies?” I asked.
Ms. Marshall got more specific. She was talking about 1) the subsidies the big oil companies receive for ethanol blending, she said, and 2) the federal subsidies to Big Oil for “Research and Development.”
I asked how that second one works.
“When they realize a well is starting to get low,” the treasurer said, “they call Washington and they get more money to start a new well.”
I called the American Petroleum Institute, in Washington, and asked their tax attorney, Stephen Comstock, if that’s true.
Everything Ms. Marshall and other Democrats describe as “subsidies” to big oil are in fact tax deductions or tax credits for costs incurred, Mr. Comstock explains — deductions they can take on their tax returns. No one in the government is mailing any subsidy checks to the oil companies, he insists.
“Scored” over 10 years, those deductions and credits are usually cited as adding up to $44 billion, including depletion allowances, he says — not $100 billion.
“They’re all deductions. There are two credits that are in the code, but because they phase out when the price of oil reaches a certain point, they’re not longer relevant.
“If you drill a non-productive well, you get to recover the cost of labor associated with drilling that well. If I have tangible equipment like the steel I put in the ground that can’t be recovered, I get to depreciate that. And then there’s percentage depletion, the ability to recover the cost of your investment in the mineral interest; you recover that costs as you operate the land. Now, not everyone gets the percentage depletion. In fact, the big firms including ExxonMobil or ConocoShell are precluded from getting a percentage depletion, so when she talks about ‘Big Oil,’ Big Oil does not get all of them.
“These are deductions that are associated with all extractive industries, or the manufacturing deduction, all manufacturers are eligible for it, they all get it at a 9 percent rate, where the oil and gas industry gets it at 6 percent,” Mr. Comstock says. “If you were to make the claim that all of that is subsidy, which adds up to $44 billion, that’s about $4 billion a year, because it’s done as a 10-year scoring. The only way it would ever make sense (to claim such a large number) is over a 10-year period.”
$34 BILLION — STILL NOT ‘THEIR FAIR SHARE’?
And the ethanol “blending” credit?
“A person who gets ethanol and then blends it any into fuel has been getting a credit (that adds up to) $5 billion to $6 billion a year. Currently that’s expected to sunset at the end of this year, so that would go away. … And, 2) the ethanol producer has included in its price the fact that there’s a credit coming, so the real beneficiary is the ethanol producer.”
(Mr. Comstock referred me to a 2010 study by the Congressional Budget Office which found biofuel incentives in general cost about $6 billion a year, total, and that the ethanol blenders credits — which makes up the largest portion of that amount — actually benefit ethanol producers and farmers, who can charge more for their products, since everyone knows the blenders will get the tax credit in compensation.)
But adding ethanol to gasoline in the summer isn’t optional, right? Congress requires it. So if Democrats are going to call this whole deal a “subsidy to Big Oil,” why don’t the oil companies simply respond by demanding an end to the whole ethanol mandate, along with all the subsidies and credits, which at heart are designed to disguise the true cost of diluting our gasoline with corn whiskey?
“We just try to be agnostic on it,” Comstock replied. “We’re always under such scrutiny, we tend to be very quiet on that. And for right now it’s expected to go away.”
What about this “R&D” subsidy Ms. Marshall referred to?
“The only thing I can think of is that’s the deduction combined with our Intangible Drilling Cost. … Any Research and Development activity, it can be deducted, the labor and so forth, and in some instances we even get a credit for it. The ability to drill a well, it’s still a risky venture, it’s still not a sum certain at the end of the day. So we equate our IDC (Intangible Drilling Costs) deduction to an R&D deduction. They’re intangible because they’re not recoverable at the end of the day.”
And once the oil companies take all these credits and deductions, what do they end up paying?
“Our effective tax rate is 41 percent as an industry on a world-wide basis,” Mr. Comstock concludes. “Royalties and lease benefits to the federal government, that’s $8 billion to $10 billion a year. We pay about $86 million a day in income tax, rents, royalties and leases, which is around $34 billion a year to the U.S. government.”
Should we eliminate “loopholes,” creating a simpler tax code? Sure. How about the mortgage interest deduction? That’s a “loophole,” intended to distort the market by making home ownership more attractive. What I’d like to know is whether politicians who want to get rid of “loopholes” simply intend for me to pay an extra $3,000 (or whatever) per year in taxes once I can no longer deduct those interest payments, or whether they intend to adjust all individual tax rates downward to make such a piece of loophole-elimination “revenue-neutral.”
But that’s the PERSONAL income tax; that’s simple. How can you get rid of the deductions in the BUSINESS tax code which are designed to make sure enterprises pay taxes only on their retained profits?
Supermarkets famously operate at tiny profit margins — maybe 1.5 percent. A grocery that grosses a million dollars a month may pay taxes on only a $15,000 profit. Take away the “loopholes” that allow that enterprise to deduct the cost of buying its produce, shipping it, refrigerating it, shelving it and ringing it up — tax it on its $1 million in gross monthly revenues — and that store would be out of business in the blink of an eye. Why don’t Democrats call for eliminating THOSE “loopholes”?
WARPING THE MARKET
Paul Driessen — he’s a geologist, attorney, public relations guy, author of “Eco-Imperialism: Green Power, Black death” — tackles what he calls the “Big Oil subsidy disinformation” campaign on netrightdaily, at http://tinyurl.com/3jjaybc:
“Every American manufacturing company gets tax deductions that help it create jobs and strengthen our economy — whether it produces newspapers, furniture, cars or fuel. Eliminating those deductions would increase unemployment and further slow our nation’s desperately needed economic recovery,” Driessen says.
“Yet that is precisely what President Obama wants to do when oil companies want to use the deductions. It is … part of the administration’s strategy for replacing fossil fuels with heavily subsidized ‘alternatives’ that taxpayers cannot afford, and consumers will not purchase on their own. …
“Oil industry tax deductions cover costs incurred in exploration, drilling, production, transportation and refining. They aren’t subsidies or special tax breaks. …
“Between 1981 and 2008, the largest consolidated oil companies (‘Big Oil’) alone paid $1.95 trillion in severance, property, excise, sales and corporate income taxes, the Tax Foundation reports. …”
Mr. Driessen is good at getting to the underlying point. If you want lower energy prices and less “dependence on foreign oil,” take the government’s “boot off the neck” of the oil drilling and refining companies, he says; let them drill offshore, in a tiny slice of the Arctic National Wildlife Refuge, wherever. On the other hand, eliminating “loopholes” (a euphemism for “raising taxes” on the oil companies) will inevitably result in higher energy prices, which is precisely what Mr. Obama and Co. really want, since that makes their wind farm and solar panel boondoggles look more attractive.
“Real subsidies take money taken from society’s productive sectors, and transfer it to legislators and bureaucrats, who give it to companies that ‘deserve’ funding, because they provide politically favored products,” Mr. Driessen notes. “Evergreen Solar received $486 million in federal and state subsidies — but still closed its doors and fired 850 workers, when the subsidy well ran dry. …”
One thing Ms. Marshall and the Democrats are right about is the ethanol subsidy. It’s insane. It requires Americans to use a more corrosive fuel that gives them one third lower mileage; it uses up a quarter of all the corn grown in the U.S. — driving up the cost of groceries and especially corn-fed meat all around the world — and it saves NO energy and reduces NO pollution, once you factor in all the fossil fuel burned in farmers’ tractors, in trucking corn to the distilleries, and in the distillation process itself.
Get rid of the subsidies — and the mandate.
“The bottom line is simple,” says Paul Driessen. “The worst thing we can do is what President Obama is intent on doing: use the mythical revenues he expects from eliminating oil company ‘subsidies and tax breaks’ to increase federal wind, solar and ethanol subsidies by another 50 percent (to $18 billion a year) . …” ignoring such inconveniences as all the endangered hawks and eagles killed by windmills, deaths that would draw stiff federal fines if they occurred in oil waste ponds.
“As should be abundantly clear by now, these energy sources are not so clean or eco-friendly. They can’t exist without perpetual subsidies. They are simply not sustainable.”
To provide reliable, affordable, ecological, sustainable energy,” Mr. Driessen argues, “we need to do three things: Open America’s public lands for responsible hydrocarbon development. Take the boot off the neck of American businesses. And get rid of all the subsidies, bailouts, targeted tax breaks, selective tariffs, mandates to purchase ethanol and other products. …”
Tax credits and deductions are not “subsidies.” The late Murray Rothbard may have said it best:
“An exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master.”