IF EVER AGAIN you hear the speech from the administration about how Congress never met a tax break it didn't like -- about the way House Democrats have muddied up the president's tax reform proposal by doing all those favors for their friends -- think oil. The oil industry -- its independent producers even more than the major companies -- has always been a symbol of tax favoritism. Its most famous provision is the percentage depletion allowance, now limited to independents and their investors, whom it saves about $1 billion a year. The more valuable preference today is the right to "expense" what are called "intangible drilling costs," meaning to deduct them in the year incurred instead of spreading them over the life of a well. These up-front deductions will cut taxes on oil income an estimated $2.3 billion in this fiscal year.
The current concept of tax reform is a trade-off. If there are fewer preferences, the same amount of revenue can be raised more equitably at lower rates. The Treasury in its original reform plan last November took this model seriously. It proposed repealing both percentage depletion and expensing of intangible drilling costs, along with most other special provisions in the code.
The plan then went to the White House, which sent its version to Congress in May. In that version the stated rationale was the same, but all the provisions were not. For oil, the proposal was that both depletion and expensing of intangibles be preserved.
A third plan was then advanced by Rep. Dan Rostenkowski, chairman of the House Ways and Means Committee. He offered a compromise on oil: to phase out depletion and limit expensing to the period before a well starts to produce. This would have raised the taxes of oil producers $9 billion over the next five years.
As Ways and Means has worked through the tax bill in recent weeks, the administration has stood conspicuously aside on most issues. The business of marshaling votes and the responsibility for the outcome have been left to the chairman. But on the oil issue Treasury Secretary James Baker suddenly came alive; he busily rounded up votes -- against Mr. Rostenkowski. The result was a further compromise that will raise only $4 billion over the five-year period.
Of course all kinds of weighty arguments can be made, and are, in behalf of the oil preferences. But the other sectors that the bill would touch -- heavy manufacturing, real estate, timber, the pension industry, state and local government -- all have such arguments too. It seems that there are forever two kinds of tax preferences, bad and good. The bad ones are the other guy's.