Senator Kyl debunks myth about oil-gas subsidies

U.S. Senate|Former Senator Kyl (R-AZ)|December 1, 2017
USATaxes & Subsidies

In 2012, Senator Bob Menendez (D-NJ) filed S.2204, the Repeal Big Oil Tax Subsidies Act of 2012, that would eliminate over $20 billion dollars in what he defined as annual tax subsidies for “major integrated oil companies.” The savings would be redirected to renewable energy programs. The bill failed, but during the floor debate, Senator Kyl (R-AZ) presented a detailed review of the tax code regarding the oil and gas industries and showed how there were no special tax provisions for these industries. The transcript of Senator Kyl's speech on the Senate floor is provided below and can be accessed by clicking the links on this page.

Mr. KYL. Mr. President, I will address the bill that will be before us later today.

The title of the bill is ‘‘Repeal Big Oil Tax Subsidies Act.’’ I think that title begs the question: What is a tax subsidy? Most Americans would define a tax subsidy as a payment of cash, such as through a tax credit, from the government to a particular industry. Does this bill address subsidies? The answer is, absolutely. But instead of repealing tax subsidies, it actually creates more of them. 

Under this bill, the government would subsidize particular industries or activities through a host of tax credits. These subsidies range from tax credits for energy-efficient homes, alternative fuel vehicles, plug-in electric vehicles, cellulosic biofuels, wind energy production, biodiesel and renewable diesel, and the list goes on and on. In other words, the Tax Code would be providing special tax breaks for specific industries, and the one thing that is common to all these is that they are the so-called green energies. They are the ones that would receive the special tax treatment, to the tune of $12 billion. There are even direct cash grants from the Treasury Department for industries that invest in green energy so companies don’t have to worry about whether they have a tax liability to take advantage—direct cash grants. These are clearly subsidies aimed at particular industries, the very thing the President himself has said we should avoid if we want a simpler Tax Code with lower rates that doesn’t pick winners and losers. 

So, yes, this bill deals with tax subsidies. It creates a bunch of them, and they are in a very specific area—$12 billion worth.

What about oil and gas? It turns out there are no special tax provisions for oil and gas. There is no special oil and gas loophole or giveaway, as somebody called it. Oil and gas companies use the same IRS Code other kinds of companies use. They pay taxes under those provisions. They get deductions or credits under some other of those provisions but nothing that doesn’t apply to other industries the same way. In fact, what this bill does is to take away the rights of oil and gas companies under some of these provisions and leave those provisions intact for others. In other words, it discriminates against specific companies within a specific industry.

There are four particular areas. The first is section 199 of the Tax Code. This is the basic code under which all producers—people who manufacture things, who produce things—are allowed to take what is called a manufacturing deduction of 9 percent, except we have already discriminated against the oil companies. They can only take a deduction of 6 percent, but it is the same for the other industries; otherwise, it is 9 percent. But this bill would eliminate that deduction altogether for the larger oil and gas companies—the so-called integrated companies—but not for other domestic producers. So it is discriminatory twice over. Remarkably, therefore, companies such as the Venezuelan company, CITGO—a large oil and gas producer—could continue to take the deduction, but U.S.-based companies could not. 

How is that for double discrimination? First, all other companies in the country get to deduct 9 percent, big oil companies only get to deduct 6 percent, and this bill would eliminate that deduction for some of the American oil producers. 

How about intangible drilling costs. This is part of the so-called R&D—or research and development—tax treatment. Research and development is something many businesses do, and when they do it, they get to deduct those costs as against their tax liability. For the oil and gas industry, the research and development is called intangible drilling costs. Those are part of the R&D exploration for energy. Again, the oil companies are actually already discriminated against; whereas, other businesses can expense 100 percent of these R&D costs; large oil and gas companies, as I have said, can only expense 70 percent. So they are already being discriminated against, to some extent. This bill would further discriminate against them by eliminating the expensing altogether. In other words, whereas most companies can expense 100 percent and smaller oil and gas companies could still expense 100 percent, these larger companies could no longer expense any of it. Their current-year deduction would be gone. 

The third area is for businesses that have operations abroad that pay both taxes and royalties. They are called dual capacity companies. There are a lot of dual capacity kinds of businesses. Oil and gas is one of them because they pay both taxes and royalties; casino operators are another, to give another example. In order to prevent double taxation for American companies that pay both foreign taxes and American taxes—and obviously they are competing against companies that only pay taxes once—in order to mitigate that, every American company, whether it is an oil company or any other kind of company, is allowed to take a foreign tax credit for foreign taxes paid. So whatever their American tax liability is, they get to take a credit against that for what they have already paid to another country in tax liability there. 

If they owe $100 in taxes and they have already paid Great Britain $70 in taxes, then they get to take a credit of that $70 against the $100 American liability. That is the way it works for all businesses abroad, including the dual capacity taxpayers.

This bill would eliminate part of the foreign tax credit for the large integrated oil and gas companies; therefore, putting our companies at a severe disadvantage with other oil and gas companies doing business around the world. Of course, oil and gas business is all around the world. They go where the oil or the gas is and extract it and then ship it to the user. Why would we deliberately give foreign competitors an even greater advantage in foreign markets than they already enjoy? As I said, this bill singles out oil and gas companies and would not extend the same discriminatory treatment to other dual capacity taxpayers such as, as I mentioned before, casinos. Again, it is a double discrimination against oil and gas companies. 

Finally, we have what is called percentage depletion. Every company, including oil and gas companies, that extracts minerals from the Earth or other substances from the Earth is allowed to use the percentage depletion method for calculating their taxes. But, again, for the last 30 years, the large integrated oil and gas companies can’t do it. So they are already prohibited from using this method. This bill repeals it again, so we are going to repeal something that has already been repealed. I guess that is OK. It is not necessary. I guess it is a way to further kick somebody in the rear end if we don’t like them. 

The question is, therefore, why should we be doing this to oil and gas companies? The Wall Street Journal pointed out in a recent editorial—by the way, the title is ‘‘Big Oil, Bigger Taxes’’—that the oil and gas industry is subsidizing the government, not the other way around. Because of the amount of taxes oil companies pay—far more than other companies—they are actually subsidizing the U.S. Government. Oil and gas companies paid almost $36 billion in taxes in 2009 alone. That is just one industry—the oil and gas companies—$36 billion. According to American Petroleum Institute figures, oil and gas companies had an average effective tax rate of 41 percent in 2010 and paid more in total taxes than any other industry.  

For those folks who somehow suggest oil and gas is getting some big break, that they are not paying their fair share in taxes, this evidence clearly refutes that. We will remember the President’s Buffet rule: Everybody should pay at least 30 percent in taxes. Oil and gas companies already pay at the rate of 41 percent, so it is not as if they are getting off with some kind of special break. 
Generally, our Tax Code allows companies to recover their expenses. It allows businesses, including oil and gas businesses, to recover their costs of doing business. As I said before, the oil and gas industry is already discriminated against. They can’t recover all their costs. Under section 199, for example, other companies get to deduct 9 percent; they can only deduct 6 percent. This bill would also remove provisions that allow them to expense. So the code which already treats them the same or worse than other industries would now treat them substantially worse. 

Yes, of course, oil and gas  companies have profits and, in some cases, they are large profits. But they are large in scale—their businesses are large in scale—because they have to be in order to compete. It costs billions of dollars just to invest in one oil rig out in the Gulf of Mexico, for example. According to industry estimates, it costs between $1.3 billion and $5.7 billion to produce oil in one deepwater platform in the Gulf of Mexico. Think about it: If someone is making $200 a year, obviously, they can’t do that. It takes companies that make an enormous amount of money to spend $5 billion on one oil platform to try to find oil and gas. Don’t we want companies such as that to find oil and gas so we can get more of it on the market so we don’t have to pay as much when we try to fill our car at the pump?

What would happen if we used the Tax Code to further penalize oil and gas companies with these massive tax increases? Does anybody think the costs aren’t going to be passed on? According to the Congressional Research Service, tax increases such as the ones in the bill ‘‘would make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence.’’ 
Everybody talks about reducing the price of gas at the pump and reducing U.S. dependence. What these tax increases would do is to further that dependence and increase the prices at the pump. This isn’t like shooting ourselves in the foot; it is like shooting ourselves in the head. Why would we do this? We would have less domestic energy production. Obviously, taxing an activity more means we will get less of it. 

How about jobs? The oil and gas industry supports more than 9 million American jobs. The American Petroleum Institute estimates that 1 million new jobs could be created in the next 7 years if punitive new tax increases and unnecessary new regulations are avoided. We desperately need to create jobs. These are good American jobs. Why would we want to destroy jobs by imposing an unfair tax on an industry which is producing something we desperately need? 

Foreign oil companies, such as those based in Russia and China and Venezuela, would have an even greater competitive advantage over American companies in these overseas markets if we impose these taxes on American companies. 

Finally, we would hurt tens of millions of Americans who invest in these companies through pension funds, retirement accounts, and mutual funds. In other words, this bill would eliminate tax provisions that are not giveaways or subsidies to producers in the United States in order to pay for tax subsidies that would be given to specially chosen industries—so-called green industries. In the process, we would get higher fuel prices for consumers, less domestic oil and gas production, more dependence on foreign oil, fewer jobs, less American competitiveness, and less retirement saving. This does not sound like a deal worth making. I yield the floor. 


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