Senate Holds Hearing on Big Oil Tax Breaks

The Senate Finance Committee held a hearing yesterday on tax breaks for the nation’s top five oil companies: Chevron, Shell, ConocoPhillips, BP America, and Exxon Mobil.  At stake is $21 billion in alleged subsidies.  Should oil companies be allowed to keep the tax credits?  Should tax payers no longer subsidize big oil?

If the debate were over a bonafide subsidy, the solution would be clear and simple.  End the subsidy.  And while they are at it, end all corporate subsidies. Whether the corporation involved were an oil company or a renewable energy company, the answer would be to cut the subsidies.  Tax payer money should not be lining the profits for corporations.  The story should end here. But…

Subsidy or Tax Credit?
However, this topic of debate is not so cut and dry.  The line between subsidy and tax credit is muddled, but it makes all the difference in the world. A tax credit lets a company keep a portion of income earned- it never leaves the company coffers. A subsidy comes from government budgets. Even if the budget is built of taxes and the final figure is the same, the difference between a tax cut and a subsidy is a huge, psychologically. Whose money is it, really?

Environmentalists generally assume that big oil receives big subsidies from government coffers. For example, take the an initiative by, “Big Oil is raking in record profits, funding the climate denial machine, and heating up our planet—there’s no reason to be spending our tax dollars to support them.”  The language at the end of the statement implies that money is going from the tax payer to big oil.  The image of a check further hints at a big payout to big oil.

The exchange between Senator Jay Rockefeller (D-WV) and Chevron Chairman and CEO John Watson demonstrates that legislators might not even see the difference.  Senator Rockefeller questioned, “How much profit on a barrel of oil do you have to make, to not need these subsidies?”

Mr. Watson responded, “As we have described, we don’t receive subsides.”

It’s no surprise that oil executives lashed out against a tax cut, which some call a subsidy.

This subtlety is the crux of the problem. If big oil receives “tax cuts,” we aren’t spending “our” tax dollars on big oil at all. Rather, big oil just gets to keep their own (hopefully legally and rightfully earned) money via a tax credit.  Is being able to keep the fruits of ones efforts so wrong?  What if it were a renewable energy tax credit being rescinded?  Would our thoughts be different then?

Taxing Big Oil to Balance the Budget
The motivation for calling big oil tax credits into question is mainly two fold. One, energy prices are on the rise.  Higher prices mean higher profits.  In governments eyes, higher profits means more tax “revenue.”

Two, the government desperately needs to balance the budget but also pay off the national debt.  It’s no secret that this country is in huge debt.  Who should bear the deficit and debt burden?  Should we raise taxes (especially on oil companies) or cut spending?

And an ancillary yet pertinent third reason is in attempts to steer big oil tax money over to green energy development.  This third reason somewhat defeats the purpose of attempting to balance the budget shortfall.

Taxing Big Oil to Protect the Environment

One argument heard often from the sustainability community, in favor of further taxing big oil has little to do with profits or tax “revenue” generation per se, but focus on oil companies’ impacts on the environment.  Proponents of this argument suggest that taxpayer money is spent on cleaning up environmental and human health externalities, hence the reason to tax big oil.  Furthermore, it is again suggested that this tax money can be used to spur innovation in green energy technologies as well.

If oil companies are harming the environment or someone’s property or even our easement clean air, that is where the fight needs to be taken.  Taxes are a completely different story, and just makes energy prices higher for all of us.

While it would be apt to move away from fossil fuels because of their negative impact, increasing taxes will not solve the problem.  Bringing to market renewable alternatives on their own merits is a more sustainable way, than attempting to tax away our energy problems.

The Tax Hurdle
Yes, we need to move away from fossil fuels.  Yes, we need to cut subsidies to not only big oil, but any corporation.  But this debate is over a tax, not a subsidy.  Taxing only creates a barrier to finding real, sustainable solutions.  Taxing may even prolong these very sustainable solutions from coming to the marketplace.

Jonathan Mariano is an MBA candidate with the Presidio Graduate School in San Francisco, CA. His interests include the convergence between lean & green and pursuing free-market based sustainable solutions.

2 responses

  1. Because the oil industry has been around so long, it has effectively integrated many of its subsidies into other forms. For example, there are tax deductions, tax allowances, and tax credits — each of which impacts a company’s bottom line (and the government’s deficits) differently. Then there are non-cash subsidies, such as the $75 million cap on liability oil companies enjoy for offshore drilling accidents. How much it costs the government depends on how many accidents occur and whether the government actually spends the money to restore the environment — but the financial benefit to the oil companies is huge. Simply put, they could not afford (and might not even be able to find insurance companies willing to underwrite) private sector insurance to cover the same risks. And we haven’t even begun to talk about how leases to drill for oil on government land are priced or how royalties are calculated and paid (or not paid) and all the other subtle ways the oil industry uses government assets, funds, and financial power to generate private profits.

    That is exactly how the oil industry wants to keep it. Subtle, confusing, and complicated, so it can maintain all these benefits while we debate whether a tax credit is a subsidy.

    John Howley

  2. I dont understand why we cant cut spending AND raise taxes to balance the budget? Im willing to see my taxes go up to solve the deficit issue why shouldn’t Exxon?

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