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Repeal the so-called subsidies to oil and gas? Ostensibly this is a punitive measure that targets oil companies for the rise in the price of gasoline at the pump, even though most gas stations are independently owned, and need to make a profit in their businesses.
First of all, these are not subsidies per se. Rather they are tax breaks aimed at the entire manufacturing industry — a category that includes oil & gas – and which can be broken down into four components, only one of which is specifically targeted to the industry. (It also is the least significant.)
- Domestic manufacturing tax deduction– $1.7 billion. This is a tax deduction given to every manufacturer in the US as an incentive to keep manufacturing facilities in the United States.
- Percentage depletion allowance — $1 billion. Any business can write down the cost of its capital equipment. Oil in the ground is treated as capital equipment. Again, all companies get it, not just oil companies.
- Foreign tax credit– $850 million. All companies get credit for taxes they pay to other countries, not just oil companies.
- Intangible drilling costs — $780 million. As opposed to over the life of an investment, the oil industry is allowed to write-down drilling credits in year one. This is the only “subsidy” that treats oil companies differently than the rest of the manufacturing world.
So what are we talking about here? A total annual savings to the federal government of $4.3 billion? (And this assumes no negative economic impact which is hardly a guarantee.) This is enough money to run the government for less than ten hours.
If you want to have a debate about all subsidies (tax breaks) then by all means let’s. But to single out one industry because its product happens to be in demand and as such it had the temerity to make a profit, is ludicrous and irresponsible. It is targeting people who are in the wrong business as far as politics is concerned because they happen to be in the right business as far as demand for their product goes. “Big oil” is more than just CEOs in a corner office. A company like Exxon-Mobile employs 82,000 people worldwide in all capacities from rig workers, to truckers, to geologists, surveyors, mechanics, pilots, schedulers, traders, cooks, pipeline workers, marketers, mid-level managers, etc. These are honest, hardworking people who are providing for their families while supplying world’s energy needs. Is it a crime that they get paid for their services? Apparently on Capitol Hill it is.
And yet, those same evil oil companies pay enormous taxes that far outweigh any tax breaks. Exxon alone paid $8 billion in taxes in just the first quarter. This is twice as much as the entire industry receives in annual subsidies. Yes, say our politicians, but look at Exxon’s profits. No company should be allowed to make $10.5 billion in profits while American drivers are getting squeezed at the pump. Oh? Who exactly decides what is enough? Chuck Schumer? Obama’s energy czar? Exxon provides a product that the world needs. One we cannot live without in fact. And for every dollar they make in gross profits, they pay forty-three cents in taxes. In fact, the oil & gas industry averages roughly a 9.5% profit margin, placing it down at number 23 in the list of profitable businesses.
In case you’re curious, breweries are number one at 26% profit margin. Yet I have never seen Pete Coors raising his right hand before a bloviating committee and Lord knows I need beer as much as gasoline! If big oil is “gouging” us, then other industries are positively robbing us blind. Industries that average higher profit margins than oil & gas include: applications software (22.7%), cigarettes (17.4%), railroads (12.9%) and wireless communications (11.1%).
A company like Exxon puts up big numbers because it is a very big company valued at roughly $396 billion. $18 billion is well within expectations of a successful enterprise of such scope and size. And they do not sit on this cash. Almost three-fourths of their after-tax profits are poured back into exploration and drilling. They must constantly be seeking out and delivering more energy for the consumer whose insatiable appetite continues to grow globally.
I find it fascinating that many who rail against “greedy big oil” probably do so on their iPads. Apple’s market cap is now an astounding $305 billion. And its profit margin is a whopping 21%: double Exxon’s. Steve Jobs is far more wealthy than Exxon CEO Rex Tillerson. How come? Well, one reason is that an Apple iPad 2 currently sells for $729. Yet its actual cost to make with Chinese workers [who take home a mere $185 per month] is $293, which means a gross margin of 54%.
So who is really the “gouger”? Exxon or Apple? Why is multi-billionaire Steven Jobs not in front of Congress explaining himself? Because, like his oil counterparts, he shouldn’t have to. He makes a product that people are willing to pay an exorbitant sum relative to its manufacturing cost to possess. And one can argue that we need iPads a lot less than we need energy.
I notice that coffee futures have come off in the past few weeks yet Starbucks hasn’t reduced the price of a venti skim latte mocha chi-chi foo-foo cinnamon two pump steamer. Should we have the boys in the van abduct Howard Schulze and drag him before the committee to explain his 9.7% profit margins that partly resulted from hiking prices 25 cents on some drinks when the coffee futures went up, but not giving us back that quarter when the market sold off? Of course not…
Clearly what is happening in Congress is a shameful attempt at laying the blame for their own inability to cope with the rise of prices across the board, and energy in particular, even though Washington’s policies from a decade of loose money, to sitting idle while we grew ever more dependent on overseas fossil fuels, to cordoning off huge deposits of domestic crude in our own waters and backyards are far more to blame than any CEOs. It may be politically expedient to finger-point at “big oil” for committing the cardinal sin of doing their jobs well and showing a profit (while ignoring the true ‘gougers’ in the higher profit sectors). But it makes for poor policy, and an astounding waste of taxpayer resources.
Clearly what is happening in Congress is a shameful attempt at laying the blame for their own inability to cope with the rise of prices across the board.
It’s not the profits that cause Big Oil to be “picked on.” Yes, they do get special tax breaks. This post could use more honesty. What are you ashamed of?
Percentage depletion is a tax break not available to any other industry besides oil and gas. Other extraction industries are limited to cost depletion.
IDC? ‘Nuff said.
Foreign tax credit needs reform for all multinationals – not just big oil.
Since these bennies are so insignificant, why all the whining over proposals to eliminate them?
“First of all, these are not subsidies per se. Rather they are tax breaks aimed at the entire manufacturing industry — a category that includes oil & gas – and which can be broken down into four components, only one of which is specifically targeted to the industry. (It also is the least significant.)”
Actually a tax break is a subsidy.
“# Percentage depletion allowance — $1 billion. Any business can write down the cost of its capital equipment. Oil in the ground is treated as capital equipment. Again, all companies get it, not just oil companies.”
The fact that the oil is treated as capital equipment is a pretty large subsidy in my mind. Are the trees considered capital equipment for a lumber company?
Rabiner, I have to disagree that a tax break is a subsidy.
I believe a tax break is the government allowing me to KEEP portions of my earned income; a subsidy is the government GIVING me money to benefit my contribution to industry, etc. Being allowed to write off the mortgage interest on my house is a tax break, not a subsidy. The government doesn’t GIVE me money; it just lowers my tax liability by allowing me to claim the interest.
Dennis:
I’ll just have to disagree with you. Any tax deduction is a subsidy for that particular behavior. The write offs on college education are to subsidize the expense of education. Home mortgage interest deduction subsidizes home ownership. The child deduction subsidizes parenthood.
Mr. Schaeffer, you present a lousy argument that is full of holes and misconceptions.
First of all, most Americans don’t mind the oil companies making huge profits; they just protest giving the special tax breaks – tax expenditures – given to very profitable companies that don’t need the breaks. Even the industry said as much a couple years ago. It feels, to many Americans, that we’re being taxed or asked to sacrifice so big companies can get special breaks. Traditional class warfare fodder from 16th Century France.
Moreover, that $4.3 billion could be used to reduce the deficit, or prevent education funding from being decreased or used to fix part of our crumbling infrastructure. There are a lot of programs being cut to reduce the deficit and that $4.3 billion could prevent some of those cuts to vital programs and services.
In addition, those subsidies distort the energy market, making it harder for new technologies and companies to obtain sufficient funding and they prevent the free market from accurately pricing energy costs. That’s no way to run a free market based economy…unless you’re China.
On another point. You mention Apple and Starbucks and ask if anyone is angry about their profits. Of course not. We all expect companies to be profitable, but are Apple & Starbucks taking billions of dollars worth of tax expenditures? If those companies were, they might well be subject to a push to eliminate those subsidies because, as highly profitable companies, they wouldn’t need to be subsidized.
As Libertarians say, if a company can’t be profitable on its own with government help, then it should go out of business. Now that might be a bit idealistic, since to some extent we might want to temporarily subsidize new industries with high cost factors to market entrance as a way to introduce innovation and growth. But, come on, the oil companies have been subsidized for a hundred years. That’s certainly long enough to depend upon the public for financial help.
Again, it’s not the profits from a company or industry. It’s reliance on public support when it’s financially unnecessary, especially at a time when public funds for everything else average citizens rely upon are being slashed.
Surely, if you’re going to defend these tax expenditures, you can come up with better arguments than these.
I would also argue that we don’t care about Apple and Starbucks’ profit margins because those two companies sell luxuries. Yeah, people WANT an iPad, or their daily iced mocha latte, but if they didn’t have those two things their lives wouldn’t be majorly affected.
However, EVERYBODY needs gas. Even if you live in a highly concentrated area and are able to walk/bike around town, you a) most likely use public transportation that also uses gas and b) eat and use products that were shipped into your neighborhood using methods of transportation that also used gas. There’s no way to avoid it. And I think that’s a major reason why people are pissed off at the oil companies–they know that there’s no serious widespread alternative, at least not at this time. Whatever the oil companies say or do, we have to take it. And a large part of why there’s no alternative is because the oil companies have used their significant influence to nudge out all other competition while also getting their own advantages (i.e. the subsidies).
The fact is that Apple’s profits are the result of building better products, and marketing them more effectively. Big Oil’s profits are based on increased demand caused by growth in China and India. The fact that these profits come largely from the Chinese communist state intervention of billions of dollars to create a domestic auto market hardly makes it a paragon of capitalist enterprise.
On the subsidies end, the real subsidies that Oil companies receive is through America’s gigantic military spending. In a true capitalist economy such as imperial Great Britain, companies whose profits are the result of geopolitical dominance such as the East Indian Tea Company paid for this dominance directly.
Oil prices are dependent on our Middle East policies which cost the countries billions of dollars and thousands of lives. But the oil market is also manipulated by American power in Europe dealing with Russia’s large natural gas resources and in various African countries. Of course America’s long term hegemony in central and south America have also benefited industry.
If Grandma is going to have to pay for her own cataract surgery than the Oil companies should have to pay for their own client states.
I think you mean The East India Company.
Yes, Thanks, Cheers
If these big oil companies actually paid any taxes on their huge profits no one would care a toss, as it is Exxon for instance pays Zero tax on it’s earnings in the USA. It pays offset tax instead outside the USA and shelters the rest using shell companies in tax havens.
So we give subsidies to tax avoiders.
Why does “Big Oil” even need that much money…
“Big Oil” doesn’t exist in America.
Real “Big Oil” is Saudi Arabia, Iran, UAE, Kuwait and the rest of OPEC.
The anti-US oil industry wants to pick on American oil and as a result continue to shift oil power away from Americans even more.
The US was not successful in bringing anti-trust law to the international oil environment and so settled poorly to try and make the US oil industry more converged and less competitive internally.
Oil is not a free market.
Sherman Anti-trust needs to be applied to world markets in a fair way.
Break up OPEC though special import tariffs on all of the oil that comes from OPEC.
Encourage switch to natural gas for trucks and other efforts as long as the international oil market is not a free market.
congratulations, you made it through the first sentence without making me laugh. the repeal of the tax breaks is aimed at removing a distortion from the markets. lance armstrong does not need training wheels. if he asks me to buy him some, i will likewise refuse.
i have to say, all other things aside, i really feel that this article is just dishonest. it is such a patchwork of selective evidence, and it so neatly dances around the plain truth that i cannot fathom a person writing it in good faith. it smells.
Schaeffer just regurgitated the standard corporate argument which is the the guvmint needs to let the free market work and stay out of business except to when it’s giving me subsidies.
The whole mfg tax break is a subsidy (Brad apparently doesn’t understand the meaning of this word). It subsidizes companies to keep mfg jobs here – maybe that’s a worthy goal, but being a worthy goal doesn’t mean it’s not a subsidy. I’m hard pressed to believe we are getting our money’s worth out of this break.
It’s interesting how many conservatives decry stimulus spending as ineffective, but never seem to have any data to justify the effectiveness of all the tax breaks we give corporations to “generate jobs”. My guess is we are paying 80-100K per job – quite a bit more than the job is adding back into the economy.
Tax breaks aren’t a subsidy? Schaeffer either is lying or doesn’t know what the definition of a subsidy is. I’ll leave others to decide which. The amounts are not large in the scheme of things but this entire controversy demonstrates yet again the complete phoniness of Republican concern about deficit reduction. According to them American civilisation is going to end unless the deficit is reduced but apparently the end of civilisation cannot be prevented by the removal of a subsidy to one of the most profitable industries in the country. Q.E.D.
“Tax breaks aren’t a subsidy? Schaeffer either is lying or doesn’t know what the definition of a subsidy is. I’ll leave others to decide which.”
Tax breaks aren’t a subsidy. In a subsidy the government votes to pay somebody money from somebody else. The amount of the subsidy is defined by the government. For instance, when the Government gives a student a Pell Grant, that is a payment, in an amount set by the government, to somebody else, with money from the Treasury.
A tax break is the government refusing to take money from somebody who earns it, if they earn it. The amount of the tax break is defined by the taxpayer. For instance, I could exempt mortgage payments from my income taxes, except, I don’t have any mortgage payments. I get the tax break. Its value is defined by my actions ($0.00).
Great. Another economic lightweight who can’t do math.
I’ll make it easy for you. If I take in $100 and then give out $10, I have $90. If I tell the entity giving me $100 that they can pay $10 less, I have $90. It’s called math, and really, really, really basic math at that. The important thing to note is that the end result is identical.
Any questions?
Except it’s not your $100 until, and unless, somebody gives it to you.
If they give you $0, you have $0 and you paid out $0.
If you give them $10 they never had, that’s a subsidy.
If you’re reducing the amount you will demand they give you, that is not a subsidy.
Do you believe that taxation is some sort of nebulous “demand” rather than a requirement for living in a functional society? That’s just delusional.
Wait. I just realized that you’re one of those something for nothing Republicans. You want a strong national defense, a functional government, roads, the internet, etc. but you think that all taxes are bad. So in your brain, telling a company that they don’t get special breaks that nobody else gets is somehow a tax hike and unfair. It all makes sense now. Actually, it doesn’t make any sense but at least I understand how your mind works.
“Brad Schaeffer is co-founder and CEO of INFA Energy Brokers, LLC, an interdealer broker of complex energy derivatives, a veteran of the commodities markets since 1990, “
And there you have it!
Put “Big Oil” next to Israel on the list of things the FF says should be backed to the hilt with a steady flow of our tax dollars without question. Meanwhile, Medicare and Medicaid should be slashed to pay for it.
Wow. I hope DF got some advertising revenue out of this one.
Another Brad Schaeffer article on the energy sector, a sector that Schaeffer personally profits from as an investor/speculator every single day. This is the type of guy who is driving the price of oil higher through speculation or at minimum is increasing the oil price volatility.
Brad,
Your discussion is so lame and so varsity. You are truly a simpleton or are you? Given that you work in the energy investment business you are likely not all that dumb on these issues, so you are likely really just lining up all those oil & gas talking points in order to protect your golden goose. Did the well compensated PR firms of the oil industry send you a cheat sheet?
To compare the oil & gas industry and other resource industries with all other industries is bullshit. First of all a large part of the oil & gas reserves in this country are owned by the government and taxpayers. The oil companies buy the right to take it out of the ground from U.S. taxpayers. So right from the start the oil industry has a completely different relationship than other industries with tax payers and American consumers.
Yes, corporate welfare is wide spread, so that does not mean we cannot do something about it, particuarly for industries that make obscene amounts of profits. The oil & gas industry is the least deserving of any industry sector to receive corporate welfare. The oil & gas industry is being singled-out precisely because of its obscene profits versus other industries. Apple does not make anywhere near the profits as the oil industry. Something is not right. U.S. tax payers and consumers are getting the shaft. There is a direct transfer of wealth in this country from the average joe to the wealthy and people like you through the dividends the wealthy receive from the obscene profits of the oil industry.
The question you have to ask is why is the oil industry so profitably? In fact, outrageously profitable?
What Brad Schaeffer fails to admit is that the oil & gas industry is subsidized in many ways and not just in tax breaks. Is it possible that the U.S. government is giving away these resources far too cheaply. Remember the oil companies largely do not actually own the oil in the ground. They largely acquire the rights to drill for it for a price from the U.S. government and taxpayers. Maybe that price the government charges is way too low, particularly when the price per barrel is where it is.
Another important point here is that most of the major oil companies pay close to zero taxes or very little taxes as they shelter their profits overseas through purposeful accounting to avoid taxes. Does that seem reasonable? Exxon paid zero taxes in 2009 during another record oil price year. We have yet to see how much taxes they will pay in the U.S. in 2010.
“Exxon alone paid $8 billion in taxes in just the first quarter. “
This is such a bullshit statement. Brad uses a tried and true trick here of purposely not revealing all the information around these taxes. The problem with this statement is that Exxon pays most of its taxes outside the U.S. and overseas. U.S. taxpayers are essentially subsidizing through tax breaks a massive transfer of wealth to foreign countries. Brad, how much of the $8 billion, if that really is the number, was paid in the U.S.?
Your discussion on the generic term “profit margin” means absolutely nothing. We do not judge a company’s financial wealth and fortune purely on “profit margin”. A company with a 3% “profit margin” can be considerably more wealthy than a company with an 80% “profit margin”. How do you define “profit margin”?
“These are honest, hardworking people who are providing for their families while supplying world’s energy needs.”
Are you kidding with this statement? Cry me a fucking river! So many points one could make here. First of all unless the employees own a significant amount of the oil company’s stock they are not really benefiting from the obscene profits. The wealthy shareholders are, who collect big dividend checks. Second, what about all the hard working U.S. taxpayers. Why should they be subsidizing these oil industry investors and employees?
You think its big market capitalization is the reason for its big profits and numbers. You are such a moron. I thought you were in finance. The reason the Exxon Mobile has such a huge equity market capitalization is precisely because of the huge profits and dividends it generates and not the other way around. You have no idea what you are talking about or maybe you do but you are just regurgitating an oil industry talking point.
“Clearly what is happening in Congress is a shameful attempt at laying the blame for their own inability to cope with the rise of prices across the board…”
No, what is happening in Washington and amongst taxpayers is the realization that this industry does not need to be subsidized in any way shape or form. They are big boys and they can do well by themselves. In this time of budget deficits we need to find as many ways to help with the fiscal matters of this country. These subsidies and much corporate welfare in general should have been taken away years ago.
The problem with guys like you Brad Schaeffer is that you have no problem cutting education or healthcare spending (which is often peanuts compared to these subsidies and lack of paying taxes by the oil industry), but want the taxpayer to continue to subsidize corporate welfare. Healthcare and education have a real meaningful impact on peoples lives while an Exxon shareholder adding another Rolex watch to his/her collection does not. No wonder the wealth in this country continues to be concentrated at the top. It is all those big dividends the wealthy receive and the taking it in the ass the average joe takes, as he not only pays big dollars at the pump, but simultaneously subsidizes an industry that pays most of its taxes overseas and continues to transfer the wealth in this country to the dividends of the wealthy or “investor class” or the “producers”.
I agree with the idea that specific companies and specific industries should not be targeted for special governmental punishment. I of course also support the repeal of special governmental rewards to companies and industries that don’t need them for reasons of national investment or national security. So the issue is not as black and white as this article portrays it.
Plus, I see a lot of right wing politicians and talking heads complaining that this doesn’t amount to much savings and that it should not target specific companies. The cognitive dissonance between these complaints and the recent push to defund Acorn, NPR, and Planned Parenthood is almost shocking. This is what happens when you push narrowly-scoped ideologically dogmatic policy positions. It comes back to haunt you. It erodes your credibility. It paints you into a corner and opens the door for your political opponents to do the same. Reap what you sow.
Isn’t it funny how special tax breaks to the oil industry aren’t worth considering due to their size, but Republicans howl about much smaller breaks for development of alternate energy sources like wind and solar. I guess it’s pretty easy to see who has purchased them. Just follow the money.
Is Big Oil REALLY Sticking It To Us?? - Kicker 102.5 // May 18, 2011 at 12:17 pm
[...] Here’s a breakdown of the different tax breaks that Senators aimed to eliminate: (source) [...]
“Do you believe that taxation is some sort of nebulous “demand” rather than a requirement for living in a functional society? That’s just delusional.”
Go get a dictionary and look up “subsidy”. The ones I find say it’s a grant of money. A tax cut permits an earner to keep their own wealth.
The political significance of preventing a merger of the terms is, that money is usually granted to enterprises that could not earn adequate gross income, and tax cuts are granted to profitable enterprises. By slurring all into “subsidies”, the distinction between a self-supportive enterprise and a marginal enterprise are confused. That’s why the WTO is confusing the two.
Furthermore it saves people who want more taxes, from having to explain why it is better to have higher taxes, by presuming that taxes really ARE higher than what oil companies lawfully pay. They ‘avoided’ their REAL tax debt. They “in effect” got a direct grant of money that was not theirs.
But we owe no more taxes than what the law stipulates, if any. And the source of the money we earn is not in question each April. It’s our money. It’s the government’s after we pay it in taxes.
Go get a dictionary and look up “subsidy”.
Got get an elementary school math book and look up “addition” and “subtraction”. You will understand that returning tax revenue via a check and not collecting it in the first place via a special tax break are mathematically identical.
As to the rest of your “argument”, what a crock of s***. To effectively say that allowing an entity to pay less in taxes because of special treatment is somehow virtuous as compared to writing a check is semantic masturbation of its lowest and most useless form. The fact is that the burden of that uncollected income IS shouldered by the rest of the taxpayer base, and continually so when it increases the deficit.
Of course, the use of special tax breaks has long been a politician’s wet dreams allowing entities to pay less while simultaneously claiming they didn’t raise spending. It’s the reason that companies invest in the purchase of politicians. And right now, every Senate Republican (except 3) plus two Dems have proven that they have been purchased.
Corporate welfare is alive and well, and you are obviously a huge proponent of it.
The correct term is ‘tax expenditure’, as used by valkayec above, although ‘subsidy’ gets the gist of the idea across.
Interestingly, the supreme court ruled recently that tax expenditures are not ‘spending’, and that the tax code can be used to offer tax breaks to private schools (some of which are religious) and it doesn’t violate constitutional protections.
http://blogs.forbes.com/beltway/2011/04/12/supreme-court-says-tax-expenditures-arent-government-spending/
“To effectively say that allowing an entity to pay less in taxes because of special treatment is somehow virtuous as compared to writing a check is semantic masturbation of its lowest and most useless form. The fact is that the burden of that uncollected income IS shouldered by the rest of the taxpayer base, and continually so when it increases the deficit. ”
******
“The correct term is ‘tax expenditure’, as used by valkayec above, although ’subsidy’ gets the gist of the idea across.
Interestingly, the supreme court ruled recently that tax expenditures are not ’spending’, and that the tax code can be used to offer tax breaks to private schools (some of which are religious) and it doesn’t violate constitutional protections.”
****
And this is why keeping the language straight matters.
It is one thing to say “The Government absolutely needs some more money, and we will take more of your money.”
It is another to say “Allowing you to keep the money that happens to be paid or given to you, is harmful to all Americans, and probably violates the separation of Church and State. The American people through its government will decide how much you can call “yours”. If any.”
Your “tax expenditure” is a brief step from Marxist “Property is theft.” Property is not theft. Private Property is not harm requiring equitable relief. Private Property is one of the basic values that government is charged to protect and limited in its capacity to consume.
Your “tax expenditure” is a brief step from Marxist “Property is theft.” Property is not theft. Private Property is not harm requiring equitable relief. Private Property is one of the basic values that government is charged to protect and limited in its capacity to consume.
The phrase has been in common usage since the 60s. Take it up with both political parties who regularly use it. And “Property is theft” is not Marxist, you illiterate buffoon. Marx explicitly rejected the idea saying, essentially, that you can’t steal something that doesn’t exist.
How can you sleep at night, knowing the burden on all Americans imposed by the uncollected revenue in your checking account?
Our enjoyment of “uncollected revenue” is a right. If the government can’t pay for itself it can spend less.
I sleep quite fine. Thanks for asking.
I’d return the favor and inquire about your ‘uncollected revenue’, but first I’d have to jump to the unlikely conclusion there is some.