In a New York Times editorial celebrating the recent demise of the ethanol subsidy, the Old Grey Lady once again descends into outright falsehood to malign the industry that Progressives love to hate:
Congress should now focus on the oil industry, which has long enjoyed a web of arcane and unnecessary tax breaks — deductions for well depletion and intangible drilling costs. They are unique to the industry and, when combined with other subsidies, cost roughly $4 billion a year.
President Obama has tried twice to kill these subsidies, without success. We hope he tries again in his coming Budget Message. The Congressional Research Service says that ending the subsidies would have no effect on gas prices for consumers and only a trivial effect on industry profits, which have been at record highs. [Emphasis added.]
Where to begin?
The ethanol blenders’ tax credit was a true subsidy. It was a dollar-for-dollar offset of a company’s tax liability, a cash reward from the federal government of 45 cents per gallon for each gallon of ethanol blended.
The oil industry items are deductions from taxable income, not subsidies. All businesses are allowed to deduct legitimate business costs, and the oil industry is no different.
Oil industry profits are large because the companies are large. The profit per dollar of revenue and return per dollar of capital investment are in the middle of the pack compared to other industries.
Cost depletion is a charge to income that, contrary to the Times’ assertion, is not unique to oil and gas. All extractive industries have some form of depletion, including timber as well as mining industries like gold, silver, gypsum, and even gravel and sand.
The deduction for intangible drilling costs (IDCs) has been a feature of the IRS Code since 1913, since the beginning of the income tax. They are a feature, not a bug (a/k/a “loophole”). Because of the risk profile of exploration, and the extreme capital intensity of the business, modifying a long-standing cost recovery scheme would certainly impact financing and drilling activity.
IDCs represent those costs of drilling that have no tangible (or salvageable) value, like labor, trucking, and rig rental costs. The issue is not whether IDCs should be deductible; instead the issue is one of timing. IDCs can be expensed in the year they occur, unlike many capital items which must be written off over a useful life.
Such tax treatment is not unique to oil and gas. Expensing IDCs is analogous to the tax treatment of R&D for computer software companies.
The benefit of both depletion and IDCs is phased out for the major integrated oil companies like BP, Exxon and Shell. Thus the pain of Obama’s punitive move would fall upon small domestic independents. Depletion, in particular, benefits "stripper" producers. These low-volume, high cost producers in aggregate account for 500,000 barrels per day of domestic production that would otherwise have to be imported.
The Obama Administration has, without a doubt, the most hostile policies in recent history with respect to domestic energy production. In the New York Times, the Administration has a willing lackey who is always ready, willing and able to distort the truth to accomplish its ends.
Cross-posted at stevemaley.com.