President Obama used his visit to a Maryland community college to address one of the hottest campaign topics of the day: energy. During his speech, he talked about his plan for achieving energy independence and investing in alternative technologies. He also discussed his proposal to strip away tax benefits from the oil industry to help close the nation’s gaping budget deficit.
Since the president mentioned “cute bumper-sticker lines” that don’t match the facts, we decided to hold him to his own standards. Is the oil industry really making higher profits than ever before while snatching up $4 billion in U.S. tax dollars every year? Have its tax deductions truly been in place for 100 years?
The president has targeted a select few industries for major tax reforms — or, if you prefer, tax hikes — in his proposed 2013 budget. The industries include fossil fuels (coal, oil and gas), finance and insurance. His plan would also eliminate certain tax breaks for individuals making more than $250,000 a year, a group that some categorize as the wealthy.
First, we should address Obama’s use of the term “subsidies.” Brian Johnson, a tax specialist with the advocacy group American Petroleum Institute, said the word implies actual investments of cash, the likes of which the administration has bestowed upon alternative-energy companies.
Technically speaking, the government allows tax deductions for oil companies, and most (but not all) of those are similar to the provisions that allow other businesses to write off the costs of doing business — only they’re specific to the oil-industry operations in this case.
One can certainly debate whether deductions are subsidies, but the president suggested rather clearly that the government is literally giving taxpayer money to oil companies. That’s not true, because the uncollected funds never counted as government revenue in the first place.
As for the president’s $4 billion figure, the White House estimates that its plan to “eliminate fossil fuel preferences” would add that much to federal coffers in 2013. However, the estimated revenue increase drops each year to an average of $2.45 billion by 2022.
That doesn’t hit the president’s $4 billion mark, but we discovered other tax deductions that the White House doesn’t list under “fossil fuel tax preferences.” For instance, there’s a six-percent deduction on oil-company income provided through the American Jobs Creation Act of 2004.
We should provide a little background on that. The oil industry wasn’t even eligible for that deduction when the tax break started in 2002 as a way to promote domestic manufacturing.
Congress added oil companies to the list of beneficiaries — along with Hollywood studios, architectural firms, Native Alaskan whaling captains and a number of other entities not directly related to manufacturing — while fixing the original policy to make it compliant with World Trade Organization guidelines.
The U.S. at the time faced $4 billion in sanctions because the initial law violated a WTO rule relating to extraterritorial income taxes. Congress extended the deduction to more companies even though it didn’t have to do that to achieve compliance.
Regardless of whether the oil industry deserves that manufacturer’s deduction, it represents a $1 billion-a-year revenue source, according to estimates from the American Petroleum Institute. This brings the total oil-industry tax provisions to roughly $4 billion a year when coupled with the “fossil fuel tax preferences.”
As for Obama’s claim that taxpayers have subsidized the oil industry for 100 years, that’s true but also a bit misleading. Only one tax provision, the deduction for intangible drilling costs, dates to 1913, which was the inaugural year of the federal tax code. That’s close enough to “100 years” for government work.
But the remaining deductions on Obama’s chopping block don’t date back nearly that far. For example, the tertiary injectant provision started in 1980, and the benefit for manufacturers began in 2004, as we already mentioned.
That leaves us with profits. The president’s remarks suggest that the oil industry is enjoying its best years ever right now. But there’s no evidence of that, because no one has tracked net revenue for the industry as a whole beyond 2010 — which wasn’t even close to a record year, by the way.
Also, industry profits have fluctuated wildly during the past 35 years, and even during the past five years for that matter — 2009 is a good example of a big dip. In fact, the industry has gone through extended periods in which profit margins were far below previous records — 1981 through 2004.
The White House provided us with news reports showing that three of the top oil companies achieved record profits at some point between 2006 and 2011. But that’s not an indictment of the entire industry (BP lost $2.4 billion in 2010, while net income jumped considerably for most other big oil firms that year), nor does it speak to where all the companies stand today.
It’s also possible that the news reports cited by the White House relied on raw numbers rather than inflation-adjusted numbers. Royal Dutch Shell made a profit of $19.3 billion last year, which probably dwarfs the company’s net income from 1920 if you don’t use 2011 dollars to compare both figures. But that would be a pretty misleading basis for making that claim.
The Pinocchio Test
The president used the term “subsidies” to describe tax deductions, and he said unequivocally that taxpayers are giving money to oil companies. The first part is highly debatable, the second is simply not true.
Obama also said oil companies have qualified for tax provisions for 100 years. That’s true, but only with one type of deduction.
Lastly, the White House provided no proof that the oil industry has been consistently profitable to the extent that he suggests. And we certainly don’t know whether the companies are making record profits “right now,” because they don’t release their earnings statements until April. The only readily available information we could find — through the Census Bureau and the Energy Information Administration (the latter of which stopped tracking profits after 2009 because of budget cuts) — indicates that the industry is susceptible to sustained swings in profitability.
Obama doesn’t appear to have delivered any whoppers with his bumper-sticker worthy claims, but we found some faults in his arguments. His remarks warrant one Pinocchio.
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