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Welfare-Case Companies: BP and Big Oil


Oil production is one of America's most heavily subsidized industries, and even this spring's disastrous spill may not change that.


The federal government granting billions in subsidies to corporations is as American as baseball and apple pie. Every year, our most profitable industries receive generous tax breaks and exemptions but, among the first in line, hands outstretched for the biggest welfare check, is Big Petroleum.

If BP (BP) wasn't high enough on America's collective you-know-what list for creating the worst environmental disaster in our history -- and possibly lobbying for the release of the only person convicted in the 1988 bombing of Pan Am Flight 103 in exchange for Libyan oil concessions -- the petroleum giant has committed its misdeeds on the American taxpayer's dime.

At a time when Congress has spent months haggling over legislation to pass a skeleton jobless benefits measure that extends $309 weekly payments to unemployed Americans so they can eat for another few months, annual welfare checks to the tune of $5 billion are a congressional no-brainer when the recipient is the energy industry.

According to the New York Times: examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9%, significantly lower than the overall rate of 25% for businesses in general and lower than virtually any other industry.

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits. These companies' returns on those investments are often higher after taxes than before.

This year alone, BP is on the public dole in the form of tax credits nearing $600 million for blending ethanol into gasoline, thanks to the Volumetric Ethanol Excise Tax Credit and its 45 cents-per-gallon ethanol incentive. Before the Deepwater Horizon oil rig sank to the bottom of the Gulf of Mexico, BP was writing off 70% of the cost of its lease -- at a savings of $225,000 per day. The rig was registered by its owner, Transocean (RIG), in the Republic of the Marshall Islands, allowing the offshore drilling company to not only avoid US taxes, but US safety regulations.

Taxpayers will also likely be on the hook for the BP oil spill if the result of the Exxon (XOM) Valdez disaster serves as a precedent. Although punitive damages of $5 billion were levied against Exxon in 1989, the oil giant appealed the decision for nearly two decades and got the fine reduced to $500 million. Since the entire settlement was tax deductible, the final price tag on the 11 million-gallon oil spill was $300 million. It was paid in 2005, a year when Exxon's profits exceeded $36 billion.

At the end of July, BP announced that it planned to offset nearly $10 billion of its $32.2 billion loss by claiming an existing IRS tax credit. Politicians and the public were outraged by the news. After all, just because a company qualifies for a tax credit, it's under no obligation to make the claim. As MarketWatch reports, "One notable example of a company that decided to forgo a deduction is Goldman Sachs Group (GS), which agreed last month not to write off $535 million in penalties as part of its settlement with the Securities and Exchange Commission." Goldman had been sued by the SEC and was facing charges that it had hid critical information from investors in its mortgage securities.The SEC was also under pressure from Congress, which had criticized SEC officials for previously allowing companies to claim tax deductions -- and thus reduce penalty fees -- in other cases.

Steve Hayward of the right-leaning American Enterprise Institute for Public Policy Research isn't in favor of energy subsidies in general. They "distort the market," he says. "Without subsidies, neither wind power nor ethanol would be in business at any scale in the US." He added that subsidies for oil companies pale in comparison to those directed at renewable resources. At the same time, he advocates for lowering US corporate income tax rates (among the highest in the world) to help prevent companies, oil or otherwise, from moving to overseas jurisdictions.

On June 15, independent Senator Bernie Sanders, of Vermont, argued a proposal to eliminate $35 billion in big oil and gas company tax loopholes and was shot down in a vote of 61-35.

So for those in favor of ending tax subsidies to oil companies, they'll have to file that under "pipe dream" or, rather, "pipeline dream."

Editor's Note: This article is a rerun, which originally ran on August 5, 2010. We bring it to your attention today in light of this piece from the New York Times: Boehner Open to Ending Some Oil Tax Breaks.

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