Posted by: bmeverett | February 17, 2011

Shame on Ed Markey (yet again)

This post is my latest effort to keep Congressman Ed Markey (D-MA) honest. One of the longest serving Congressmen in history, Ed Markey has a habit of making provocative statements that don’t hold up to scrutiny. His latest play is the “Ending Oil Industry Tax Breaks Bill” which claims to end “subsidies” for the highly profitable oil industry. As I pointed out in my post “The I Hate Congress Act” of last June 8, clever names for proposed legislation often shield a lack of any meaningful content. The drafters hope that the name on the bill will be enough to gather votes and constituent support, all the while hoping that their constituents won’t actually read the bill. On the February 16 edition of The Cenk Uygur show on MSNBC, Ed Markey explained that The EOITB bill would show a stark choice between Republicans cutting subsidies for Grandma’s lunch and the Democrats taking away Big Oil’s “free lunch.” Cenk naturally demanded to know the names of all House members who voted against such an obviously virtuous bill so he could publicly castigate them for their manifest cruelty. It would have been interesting if Cenk, as a journalist, had asked Ed Markey what’s actually in the bill.

Let’s have a look. The EOITB bill proposes to repeal ten specific tax breaks for the oil industry. You can find a summary at The ten proposals are of three different types, all bad policy.

The first type is denying tax treatment to the oil industry that is available to every other industry, including foreign tax credits, the Section 199 domestic manufacturing deduction and LIFO inventory accounting. Repeal of these provisions would supposedly save $10.9 billion over 5 years. Each of these tax credits has a rationale which Mr. Markey does not dispute. He does not want to repeal these provisions for everyone, just for the oil industry. Take Section 199, for example. This tax provision allows US companies a tax deduction for their manufacturing activities conducted in the US. The intent was to encourage companies to keep manufacturing facilities, such as oil refining, here in the US. This may or may not be a good idea, but it’s wrong to deny this deduction to just one industry. Individual taxpayers get a deduction for the interest on their home mortgage. There is a legitimate argument to be made that this and other deductions should disappear as part of an overall tax simplification. It would be unconscionable, however, to pass a law that said everyone gets a mortgage tax deduction except for Fred Jones at 102 Main Street, Columbus, Ohio because the government wants Fred’s money and his neighbors don’t like him.

The second type of provision in this bill is accounting tricks, which include eliminating intangible drilling expenses, the percentage depletion allowance, Section 469 passive losses and 7-year amortization periods. Repealing these tax deductions would supposedly save $10+ billion. Businesses pay income taxes on the difference between revenue and costs. That’s the difference between an income tax and an excise tax, which is paid on total revenue. For example, if you buy a used car for $1,000, fix it up and sell it for $3,000, you taxable income is not $3,000. Taxable income is $3,000 less your costs, including the $1,000 you paid for the car plus any paint, parts, shop rent, newspaper ads and other costs you incurred to upgrade and sell the car. The accounting rules governing cost deductions are complex and often arbitrary. Intangible drilling expenses, which include costs such as wages, fuel, repairs and supplies incurred during oil drilling, can be deducted from income in the year in which the money is spent. Mr. Markey proposes that these deductions be spread out over time. Both mechanisms are arbitrary. The same is true with amortization periods, Section 469 losses and the percentage depletion allowance.

The final category is the elimination of tax credits for marginal producing wells, enhanced oil recovery and tertiary injectants. Although there is clearly an argument to eliminate these specialized credits, the only scored savings would be $43 million. The constituencies for these tax credits are not Big Oil, but smaller, independent oil companies. The 169 largest private oil companies in the world earned roughly $90 billion in profit in 2009. The five largest accounted for $71 billion in earnings and the next 33 for $25 billion. The remaining 131 oil companies lost money as a group. The three tax credits proposed for elimination were the result not of pressure from the big-name oil companies, but of intense lobbying by small and independent oil companies whose ability to be profitable is limited by their small scale, poor quality producing assets and limited technological and financial capabilities. These companies seek help from the government to compensate for their poor performance, and they often get that help because they employ lots of voters and thus have some leverage with their representatives. I would applaud Mr. Markey’s proposal to say “no” to anybody, even on a small scale, but the 9 of the 10 changes proposed in the bill contain some variant of the following language: “This legislation preserves the deduction for small and independent oil and gas producers.” In other words, the bill would hurt only companies that are successful, and not those that can’t cut it in the marketplace. Lobbying still wins out in the end.

The idea that this bill targets “subsidies” is a misuse of the word, essentially a corollary of the basic Democratic argument that all your money really belongs to the government and that any income you are allowed to keep is a favor from Uncle Sam. Last November’s election indicated a strong public desire for the government to get its fiscal house in order. Using plain language would be a good start. In today’s Washington culture, government spending is called “investment.” Tax reductions are called “costs.” Reducing the rate at which government spending grows is called “savings.” According to Ed Markey, treating oil companies the same as other corporations should be called a “subsidy.” My guess is that the public’s tolerance for these word games is wearing thin.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s


%d bloggers like this: