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Eliminating Big Oil Tax Loopholes Won’t Lead to a Tax Increase

These Are Essentially Direct Spending Programs Adminstered Through the Tax Code

The American Petroleum Institute, or API—the political arm of Big Oil—has spent millions of dollars in advertising to convince Americans to support retention of Big Oil’s tax loopholes worth more than $40 billion over the next decade. Unfortunately, some in the mainstream media have begun to repeat API’s claim that eliminating tax loopholes is the same as a tax increase. Nothing could be further from the truth.

These tax loopholes are “tax expenditures” that provide taxpayer-funded subsidies to Big Oil companies via the federal tax code instead of through direct grants. Whether in the form of special exemptions, deductions, or credits, these loopholes are essentially federal spending programs administered by the Internal Revenue Service. While many government programs promote policy goals by spending taxpayer money directly, Congress promotes many of the same goals by distributing special tax breaks.

The federal government, for example, could subsidize oil drilling by providing $4 billion in direct grants or contracts to oil and gas companies for drilling this year, or $40 billion over the entire decade. Many citizens, however, would recoil at direct federal grants to the big five oil companies—BP p.l.c., Chevron Corp., ConocoPhillips, Exxon Mobil Corp., and Royal Dutch Shell p.l.c.—which made $900 billion in profits over the past 10 years. These same companies made another $30 billion during the first three months of 2011 alone, primarily due to rising oil and gasoline prices.

And Big Oil CEOs have said themselves that incentives are unnecessary, such as ConocoPhillips CEO Jim Mulva, who stated while testifying, “with respect to oil and gas exploration and production, we do not need incentives.”

Instead, providing this same $4 billion a year, $40 billion a decade through targeted tax breaks worth the same amount somehow seems much less objectionable. These back-door subsidies enable Big Oil to falsely cry “tax hike” should Congress attempt to remove these special interest provisions to reduce the deficit. And the dollar amount given out to each company is kept hidden since IRS information is not made public.

Economists have recognized that there is no meaningful difference between tax expenditures and programs that spend money directly. Whether that annual $4 billion subsidy for oil and gas—at a time when oil companies are posting huge profits—is spent directly or through special tax code provisions, the end result is that the oil companies are $4 billion better off every year. And the federal deficit is $4 billion larger every year.

Fortunately, the fact that tax expenditures are government spending is more and more widely recognized by conservative economists and politicians. President Ronald Reagan’s chief economic advisor, economist Dr. Martin Feldstein, noted that:

These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. If Congress is serious about cutting government spending, it has to go after many of them. Cutting tax expenditures is really the best way to reduce government spending.

Former Senate Budget Committee Chair Pete Domenici (R-NM) and ex-Congressional Budget Office Director Dr. Alice Rivlin agree:

Many tax expenditures substitute for programs that easily could be structured as direct spending. When structured as tax credits, they appear as reductions of taxes, even though they provide the same type of subsidy that a direct spending program would, and like a spending program, must be financed either by tax increases, cuts in other spending programs, or increases in the deficit that pass the cost to future generations.

House Ways and Means Committee Chair Dave Camp (R-MI) agreed that tax breaks are another way of providing direct support for industry:

[W]e must admit that not all of [recent] spending has been through increased appropriations or expanded entitlements; much of it has been through the backdoor proliferation of “tax expenditures” – provisions that technically reduce someone’s tax liability, but that in reality amount to spending through the tax code.

Before becoming speaker of the House, John Boehner (R-OH) echoed this belief:

We need to take a long and hard look at the undergrowth of deductions, credits, and special carve-outs that our tax code has become. And yes, we need to acknowledge that what Washington sometimes calls tax cuts are really just poorly disguised spending programs that expand the role of government in the lives of individuals and employers.

Just six weeks after the entire Republican Caucus and 13 Democrats in the House of Representatives voted to retain these Big Oil tax loopholes, Boehner reiterated his concern about them in an interview with ABC News:

It’s certainly something we should be looking at. We’re in a time when the federal government’s short on revenues. We need to control spending but we need to have revenues to keep the government going. They ought to be paying their fair share.

Yet on May 5, all House Republicans and seven Democrats again rejected a proposal to rid the tax code of these direct tax subsidies for some of the richest companies in the world. Senate Majority Leader Harry Reid (D-NV) plans to bring a similar proposal before the full Senate to decide whether to continue these unnecessary, budget-busting tax expenditures. Hopefully, these provisions will be represented for what they are—a direct benefit to Big Oil—and the Senate will repeal them.

Seth Hanlon is Director of Fiscal Policy for the Doing What Works project and Daniel J. Weiss is a Senior Fellow and Director of Climate Strategy at the Center for American Progress.

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