Editore"s Note
Tilting at Windmills

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May 5, 2008
By: Kevin Drum

CORPORATE WELFARE IN THE OIL PATCH....Alex Knapp thinks that a windfall profits tax on oil companies is a bad idea:

However, one thing that I did notice when I was doing a little google-fu on the issue is that there appears to be approximately 20 to 50 billion dollars spent by the federal government per year on direct subsidies (as opposed to tax breaks) given to the oil industry each year. Unfortunately I can't pin down the exact number any better than that — it appears to vary every year and spread out amongst different agencies. Still, the GAO should be able to track the exact numbers down, so instead of an extra tax on oil companies, why not just eliminate their direct subsidies? Not only would that generate more revenue than the "windfall tax" (estimated to be $15 billion), but it would do so without getting the federal government into the problematic business of deciding how profitable companies are allowed to be.

I had exactly the same thought this morning, and I ended up in exactly the same spot as Alex: I couldn't figure out which subsidies/tax breaks still existed, how big they are, who they go to, or who voted for them. Royalty relief alone was enough to bring tears to my eyes. If I spent several months on this topic instead of half an hour, maybe I could figure this all out, but surely someone else has already done this?

Anyway, this really ought to be the liberal rallying cry: forget a windfall profits tax, let's work first on getting rid of the massive corporate welfare infrastructure we've constructed for an industry that really, really doesn't need it. Not as sexy as a gas tax holiday, maybe, but it makes a helluva lot more sense.

Kevin Drum 3:44 PM Permalink | Trackbacks | Comments (55)

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Comments

There you go, making sense again. You know we can't have any of that in government.....

Posted by: arteclectic on May 5, 2008 at 3:56 PM | PERMALINK

go journalism

Posted by: Chris on May 5, 2008 at 3:57 PM | PERMALINK

How can The Market work without a huge transfer of wealth from tax payers to corporations???

Posted by: John McCain: More of the Same on May 5, 2008 at 4:01 PM | PERMALINK

The problem is that democrats in Congress are no less bought and paid for industry sluts than are the republicans.

Despite their other redeeming qualities, Dodd, chair of the Senate Banking Committee, has received more than $5 million from banking interests; Biden carried the water of Delaware incorporated credit card issuers in the bankruptcy bill a few years back; and Harkin is a reliable agri-business slut. Just to cite a few.

Folks in the USA talk about corruption in other nations, but the only difference is that in the USA congress has legalized it, so as to eliminate the unseemly appearance of industry shills handing out envelopes of cash as in the old days.

Posted by: Chris Brown on May 5, 2008 at 4:01 PM | PERMALINK

Great idea! And it has the added bonus that it will satisfy all the "Cut-out-wasteful-government-spending" zealots!

Won't it?

Posted by: Quaker in a Basement on May 5, 2008 at 4:03 PM | PERMALINK

Are you talking about HR 5351? That bill was passed in the house in February but I think it has languished since.

The idea is to transfer 18 billion in special tax credits from big oil to renewable energy.

Posted by: Ron Byers on May 5, 2008 at 4:13 PM | PERMALINK

*

Posted by: mhr on May 5, 2008 at 4:17 PM | PERMALINK

Wouldn't taxing windfalls do the same as eliminating subsidies, except it wouldn't hurt the companies' numbers and we wouldn't have to track down or stop every possible subsidy that comes through the pipeline, usually hidden amongst other proposals?

Posted by: Crissa on May 5, 2008 at 4:18 PM | PERMALINK

Wait...are those direct subsidies earmarks? If so, away they go!

Oh, they go to oil companies? Never mind...

Posted by: John McInsane on May 5, 2008 at 4:23 PM | PERMALINK

I'm for eliminating ALL welfare except to REAL PERSONS. Businesses are BUSINESSES, they should be able to develop their own income through doing business. Poor people NEED help on occasion and WE should help them with OUR TAX DOLLARS.

Posted by: Mike Meyer on May 5, 2008 at 4:28 PM | PERMALINK

I agree 100%. Let's cut all the subsidies.

However, before you get too excited, my guess is that most of the money marked as "oil company subsidies" really in fact goes to non-oil projects like alternative energy. In the same way that a huge portion of federal "highway" funds don't go to highways but to silly politically correct failing transit projects, my guess is that, similarly, "oil industry" subsidies go for a lot of silly alternative energy projects.

I personally don't care where it goes. I am all for eliminating all of this subsidy mess, equally, whether it's for oil exploration or energy-from-donkey-poop or for CEO salary enhancement. But recognize before you make this the liberal rallying cry, much of this subsidy money may well be going to liberal pet projects.

Posted by: coyote on May 5, 2008 at 4:29 PM | PERMALINK

Oil closed at $120.08 today.

Posted by: R.L. on May 5, 2008 at 4:33 PM | PERMALINK

Removing oil company subsidies was a cornerstone of the Democrat's 6 in 06 agenda, it's passed the House several times, and has nearly passed the Senate.

So, you know, Democrats are offering this as an option, nobody hears about it because the media rarely covers policy.

Posted by: dday on May 5, 2008 at 4:34 PM | PERMALINK

Removing oil company subsidies was a cornerstone of the Democrat's 6 in 06 agenda, it's passed the House several times, and has nearly passed the Senate.

So, you know, Democrats are offering this as an option, nobody hears about it because the media rarely covers policy.

Posted by: dday on May 5, 2008 at 4:37 PM | PERMALINK

A reasonable outcome from Congress is more likely as we advance Public Financing of Campaigns and redistricting reform.
Many more candidates would ask rationally if liberated from inflexible partisanship and tenacious special interests.

Posted by: Paul Silver on May 5, 2008 at 4:39 PM | PERMALINK

mhr,

I hear your silly old argument over and over. Liberals don't necessarily oppose anything. There are local groups who oppose drilling off their shore. There are environmental groups who oppose drilling in Anwar. There are a lot of others who oppose nuclear. There are still others (local people in Nevada) who oppose storing nuclear waste in their back yard. The opponents to various energy projects are not necessarily liberal. They are just people who think their voices need to be heard.

You have a problem with democracy, mhr?

Posted by: Ron Byers on May 5, 2008 at 4:40 PM | PERMALINK

MHR: Jeb Bush got his brother to ban oil drilling off Florida. Damn liberals.

Posted by: Tigershark on May 5, 2008 at 4:42 PM | PERMALINK

Removing oil company subsidies was a cornerstone of the Democrat's 6 in 06 agenda, it's passed the House several times, and has nearly passed the Senate.

So, you know, Democrats are offering this as an option, nobody hears about it because the media rarely covers policy.

Posted by: dday on May 5, 2008 at 4:43 PM | PERMALINK

MHR, Tigershark is right, that "liberal" tourist industry in Florida won the day with the Bush administration.

Posted by: on May 5, 2008 at 4:46 PM | PERMALINK

However, before you get too excited, my guess is that most of the money marked as "oil company subsidies" really in fact goes to non-oil projects like alternative energy.

While that is undoubtedly true, paying oil companies subsidies to develop alternative energies is akin to paying the fox to watch the henhouse. No viable alternative energy is going to come out of the oil lobby's thinktanks, and if that money is to be spent, it is far better spent with someone who might, you know, actually develop alternative energy.

Posted by: MeLoseBrain? on May 5, 2008 at 5:00 PM | PERMALINK

As one of those rich farmers that is taking all that free money that I don't deserve that Mr. Bush hates so much, I would like to speak out behalf of the oil subsidies.

After all the projected "net income" (which is kind of tricky term} is projected at just a tick over $92 billion for 2008 and gosh we're just about "netting" what one oil corporation "profits" in one quarter now. So I certainly can understand why Mr. Bush wants to keep those subsidies going and cut mine.

After all, I just grow food!!!!

Posted by: Wealthy Farmer on May 5, 2008 at 5:13 PM | PERMALINK

One would think the Democratic Party would have jumped all over eliminating direct subsidies to oil companies several years ago, when Cheney was holding those secret meetings with oil company execs. Why didn't the Clinton admin doing anything about them? The Democratic Party has provided terrible service to their constituents.

Posted by: Brojo on May 5, 2008 at 5:17 PM | PERMALINK

A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The Senate report was ignored in the media and in the Congress.

The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”

Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” Where is the CFTC now that we need such limits? -F. William Engdahl

Posted by: Jet on May 5, 2008 at 5:18 PM | PERMALINK

Brojo,
How could the Clinton admin have stopped Cheney's secret meetings? Cheney came after Clinton, remember?

Posted by: optical weenie on May 5, 2008 at 5:21 PM | PERMALINK

Drum: If I spent several months on this topic instead of half an hour, maybe I could figure this all out, but surely someone else has already done this?

They all work for the oil companies.

Posted by: MG on May 5, 2008 at 5:23 PM | PERMALINK

The major direct subsidy is a flat-out giveaway and is already targeted for pay-go offsets to clear headroom for energy programs and for extension of unemployment benefits (the latter led by Rep. McDermott and, if memory serves, Sen. Clinton).

Windfall profits taxes would be a separate matter, making a run at the pseudo-rents induced by inelasticities of supply.

Posted by: RonK, Seattle on May 5, 2008 at 5:24 PM | PERMALINK

I wonder if the buggy-whip industry was ever subsidized?

Posted by: IntelVet on May 5, 2008 at 5:25 PM | PERMALINK

I'd vote to expropriate the oil companies, but they all seem to be based offshore. Given that they are corporate "persons", however, can we not extradite them?

Posted by: bobbyp on May 5, 2008 at 5:30 PM | PERMALINK

The GAO did some studies and it seems that America gets the lowest 'government take' on leases to oil companies. In the 1990's our dear servants decided not to take any royalties on thousands of leases in the Gulf but omitted [accidentally?] the part where it would have collected royalties if the price of oil went above 36$ per bbl. In the end [heh] the oil companies saved billions while the taxpayer got drilled.

http://www.multinationalmonitor.org/mm2007/092007/kretzmann.html

Posted by: Jet on May 5, 2008 at 5:30 PM | PERMALINK

Is it just me? MHR's original comment is an asterisk. Was it edited out? Thanks for any assistance to this newbie.

Posted by: Casey Chapple on May 5, 2008 at 5:39 PM | PERMALINK

"Is it just me? MHR's original comment is an asterisk. Was it edited out? "

MHR's comments are usually edited out. I don't think we're missing much.

Posted by: fostert on May 5, 2008 at 5:43 PM | PERMALINK

Why didn't the Clinton admin do anything to eliminate direct subsidies to oil companies?

Posted by: Brojo on May 5, 2008 at 5:43 PM | PERMALINK

Mhr's comment wasn't as crazy as it normal. He just sounded like some grumpy old fox noise viewer who never changes his channel. I am kind of surprised he was "moderated." I do have to agree with forstert, normally we aren't missing much.

Posted by: Ron Byers on May 5, 2008 at 6:13 PM | PERMALINK

Brojo,

You do realize that the house has repeatedly passed legislation eliminating the subsidies, but they are always thwarted in the Senate. Apparently it takes 60 votes to get anything passed in the Senate.

Posted by: Ron Byers on May 5, 2008 at 6:16 PM | PERMALINK
....Why didn't the Clinton admin do anything to eliminate direct subsidies to oil.... Brojo at 5:43 PM
20-20 hindsight is fun. Republican congress. Gas under $2.00 per gallon. Most were added in the Cheney Energy Bill that Obama voted for.

Looking at oil company profits? Few are more profitable than those in the US

Remember when Clinton tapped oil reserve and knocked the high gas prices down? No? History refresher course:

Saturday, 23 September, 2000, 04:24 GMT 05:24 UK
President Clinton has backed his vice-president's call
President Bill Clinton has authorised the release of 30 million barrels of oil from the US strategic reserves in order to bring down prices.
The oil will be released from America's 571-million-barrel emergency reserve over a 30-day period and could be in the hands of oil companies as early as 9 October.....
Republican presidential candidate George W Bush has condemned the move as a political ploy designed to boost the popularity of his Democrat rival, Vice-President Al Gore....

Posted by: Mike on May 5, 2008 at 6:18 PM | PERMALINK

Slinking...(damn mass media).

Posted by: Brojo on May 5, 2008 at 6:51 PM | PERMALINK

Coyote suggested that the "oil company" subsidies on the block are relate to alternative energy activities. I don't know about other legislation but Charlie Rangel's bill specifically targets "OIL RELATED QUALIFIED PRODUCTION ACTIVITIES INCOME- The term `oil related qualified production activities income' means for any taxable year the qualified production activities income which is attributable to the production, refining, processing, transportation, or distribution of oil, gas, or any primary product thereof during such taxable year.'" Speculating is a lot more fun than looking up the proposed legislation.

Posted by: Ron Byers on May 5, 2008 at 6:56 PM | PERMALINK

In the same way that a huge portion of federal "highway" funds don't go to highways but to silly politically correct failing transit projects

Of the 18.4 cents/gal Federal gas tax, 2.9 cents goes to mass transit.

Huge portion....16%

Posted by: Davis X. Machina on May 5, 2008 at 7:45 PM | PERMALINK
forget a windfall profits tax, let's work first on getting rid of the massive corporate welfare infrastructure we've constructed for an industry that really, really doesn't need it.

Sounds good, although I'm not familiar with oil subsidies. However, good luck making such a substantial and permanent change any time soon.

Jimmy Carter is the only person I’ve ever known to take on the oil companies and he did it via a windfall profits tax. I remember, prior to that, people would speak in hushed tones about how it was impossible to go against the oil companies.

Posted by: little ole j;im on May 5, 2008 at 8:06 PM | PERMALINK

WTF with this
" *
Posted by: mhr on May 5, 2008 at 4:17 PM"
etc. I see once in awhile?

I was thinking about this too as better than just a windfall tax. But there should be a windfall tax in general, best done as graduated corporate tax (higher percent tax for higher profit percentage.)
And BTW, it should matter if Microsoft etc. has higher profit percentage than oil companies.

Posted by: NB on May 5, 2008 at 8:45 PM | PERMALINK

Careful with this one. The Kennedy brothers, Jack and Bobby, both thought this was a good idea, and each ended up shot in the head shortly after floating the idea publicly.

Posted by: Ted on May 5, 2008 at 9:14 PM | PERMALINK

Gotta love our pseudo-capitalist system: if you actually need government assistance, the cupboard's bare, but if you're dripping with money, come on in and get some more! For examples beyond the oil industry, look at professional sports.

-Z

Posted by: Zorro on May 5, 2008 at 10:55 PM | PERMALINK

If it's really as high as $50 billion, and if almost none of it is really worthwhile, then the argument against the U.S. not being able to afford universal health care becomes a lot less credible...not that it was particularly credible to begin with, but still.

Posted by: Brian on May 5, 2008 at 11:00 PM | PERMALINK

I'd vote to expropriate the oil companies, but they all seem to be based offshore. Given that they are corporate "persons", however, can we not extradite them?

I don't think you need to do any of that. You just nationalize their US-based assets. Banana republics and theocracies used to do it all the time. Since the US is rapidly becoming both, it seems a natural thing to do.

Posted by: on May 5, 2008 at 11:02 PM | PERMALINK

What does this brilliant policy idea have to do with providing some degree of relief to those of us facing a squeeze this summer significantly associated with the crazy price of gas? Oh, that's right, Hillary's a bitch.

Posted by: david on May 6, 2008 at 7:49 AM | PERMALINK

In my 2004 book Take the Rich Off Welfare, I estimated $1.7 billion in annual tax breaks - principally the oil depletion allowance, the intangible drilling cost deduction, and the enhanced oil recovery credit. These should be line items in the current federal budget.

Underpaid royalties are galling for such a profitable industry, but these are numbered in the millions, not billions.

At the same time, I noted that indirect subsidies, like export marketing assistance and interventions in the Middle East, made the final total as high as $30 billion or more. After the Cheney Energy Bill, $50 billion sounds like a ballpark figure, but much of it is difficult to quantify. I, too, am hoping somebody else has done that work.

Posted by: mzepezauer on May 6, 2008 at 8:49 AM | PERMALINK

What does this brilliant policy idea have to do with providing some degree of relief to those of us facing a squeeze this summer significantly associated with the crazy price of gas? Oh, that's right, Hillary's a bitch.

Unfortunately, david, it has nothing to do with Hillary being " a bitch", it has to do with a gas tax "holiday" being an abominally bad idea.

How much do you drive each month? I drive quite a bit - 30 miles each way to the office and back - (that's a minimum of 1,200 miles a month, david) and HRC's McInsane holiday would save me...wait for it, david...$6.31 a month!

Stop the presses! You're right, david, American consumers will be gaga over that $6 a month bonus! Oh, wait, that's until the oil companies raise the price of gas to cover the price of the tax. With supply and demand, who would know?

Posted by: MeLoseBrain? on May 6, 2008 at 8:55 AM | PERMALINK

The real subsidy are the roads and the police who patrol them. Contrary to popular belief, only a portion of maintenance and building costs for roads are paid for with revenues from the gas tax (http://moderntransit.org/letters/budget.html). Furthermore, costs like eminent domain, police, etc. aren't covered at all by the gas tax. Zoning regulations further serve to make the automobile a more economically feasible transportation means than privately-owned mass transit. So, while I'm sure oil companies get a couple tens of billions of dollars in direct subsidies, these are dwarfed by the "roads consensus" arrived at after WWII. Ironically, it was actually Hitler's Autobahn that inspired former general Eisenhower to go about enacting America's biggest violation of its free market principles: the Interstate Highway System.

Posted by: Stephen Smith on May 6, 2008 at 10:29 AM | PERMALINK

"WTF with this " * Posted by: mhr on May 5, 2008 at 4:17 PM" etc. I see once in awhile?"

mhr is a rightwing nutjob and troll whose signal-to-noise ratio is unusually low, so the moderators routinely review the comments and clean up his droppings. They replace his rantings with the "*" to let people know that his mindless drivel has been removed.

Posted by: PaulB on May 6, 2008 at 10:46 AM | PERMALINK

"What does this brilliant policy idea have to do with providing some degree of relief to those of us facing a squeeze this summer significantly associated with the crazy price of gas? Oh, that's right, Hillary's a bitch."

Sigh.... Is reality always this much trouble for Clinton supporters? People are opposed to this "holiday" because the only people who will benefit are the oil companies, not end consumers. Hillary's idea of balancing the gas tax holiday with a tax on oil company profits is just stupid. If she really wants to give people a $0-30 break this summer, by far the best solution is just to send them that amount in a check. It's cheaper, easier, and it will actually go to the people she claims she wants to help.

Posted by: PaulB on May 6, 2008 at 10:50 AM | PERMALINK

I work in the energy business, and was with a major oil company for years.

I can honestly say I am not aware of a single direct subsidy oil companies receive.

Whenever I ask people what they mean when they talk about subsidies, it generally turns out they have no idea what they are talking about.

You get some people mentioning depletion allowance (which I think was dropped in the 1970's) and some who mentiion the royalty holiday.

I recall there used to be tax credits for tight sands and coal bed drilling, but those are also long gone.

My guess is most subsidies oil companies collect now are from their alternative fuels divisions...

Posted by: diz on May 6, 2008 at 11:45 AM | PERMALINK

diz,

Did you see the comment by mzepezauer? If so what do you say about $1.7 billion in annual tax breaks - principally the oil depletion allowance, the intangible drilling cost deduction, and the enhanced oil recovery credit?

How about Underpaid royalties in the millions and the indirect subsidies, like export marketing assistance and interventions in the Middle East, making the final total as high as $30 billion or more.

Is mzepezauer full of it?

Posted by: Tripp on May 6, 2008 at 2:03 PM | PERMALINK

My calculator tells me that MeLoseBrain? evidently only pays a little more than one tenth of one percent tax on his gas. Pretty good. Where do you live?

Posted by: little ole jim on May 6, 2008 at 5:37 PM | PERMALINK

I second Diz's comment- I also work in the energy industry and I am unaware of any direct subsidies to oil and gas companies from the US government.
If you want to talk about eliminating tax breaks, credits, royalty relief, etc, go ahead, but please call them by their names. (And do a little research to find out what they actually are.)

Posted by: acorn on May 7, 2008 at 10:46 AM | PERMALINK

Did you see the comment by mzepezauer? If so what do you say about $1.7 billion in annual tax breaks - principally the oil depletion allowance, the intangible drilling cost deduction, and the enhanced oil recovery credit?

Saw it, yes.

Most of those involve the timing over which an investment can be written off.

Depletion is the oil industry's equivalent to depreciation. When you invest $1,000,000 in a well, you are generally required to deduct that $1,000,000 over the production from the well, not expense it immediately.

It is common practice for all corporations for the goverment to dictate the timing over which capital expenses can be deducted. Most industries use MACRS. I suppose if the oil industry could be demonstrated to be receiving more favorable timing on its capital writeoffs than other industries, that would be something of a subisidy. I think in practice the opposite is true. MACRS schedules tend to allow deductions faster than the useful life of the asset, unit of production method depletion does not.

There used to be a concept called "percentage depletion" which could under certain circumstances allow you to deduct more than 100% of the cost of a well, and I'm happy to call that a subsidy. However, the practice was disallowed for companies producing more than a minimal amount of barrels in 1975.

I would also point out that most drilling in this country is directed at natural gas.

But, if someone can come up with a clear explanation of what these things are and why they should be considered subsidies, I am all ears.

I have invested in oil and gas projects, but also invested in wind, ethanol, and biomass. In those business, the government writes you a check for every unit you produce. You sure feel like you're getting a subsidy. Oil and gas, not so much.

Posted by: diz on May 7, 2008 at 5:25 PM | PERMALINK
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