English was not the first language of the great Austrian economist Ludwig von Mises. Hearing his graduate students at New York University repeatedly use the colloquial expression “loopholes,” he asked for an explanation. After the concept had been explained to him, according to his late student Murray Rothbard, the economist said, “Ah, so a loophole is when they leave you something that’s not taxed.”
The government hands out $100 billion in subsidies to Big Oil — it’s a talking point that every Democrat uses, these days. The implication being, of course, that Washington is cutting large, taxpayer-financed checks to the big bad oil companies every year. But what are these “subsidies,” exactly?
In fact, everything critics describe as “subsidies” to Big Oil are tax deductions or tax credits for costs incurred — deductions they can take on their tax returns. No one in the government is mailing any subsidy checks to the oil companies. “Scored” over 10 years, those deductions and credits are usually cited as adding up to $44 billion, including depletion allowances — not $100 billion — notes Stephen Comstock, a tax attorney with the American Petroleum Institute.
“They’re all deductions,” explains Mr. Comstock. For instance, “If you drill a non-productive well, you get to recover the cost of labor associated with drilling that well. If I have tangible equipment like the steel I put in the ground that can’t be recovered, I get to depreciate that.
“And then there’s percentage depletion, the ability to recover the cost of your investment in the mineral interest; you recover that cost as you operate the land. Now, not everyone gets the percentage depletion. In fact, the big firms, including ExxonMobil or ConocoShell, are precluded from getting a percentage depletion, so … Big Oil does not get all of them.
“These are deductions that are associated with all extractive industries, or the manufacturing deduction, all manufacturers are eligible for it, they all get it at a 9 percent rate, where the oil and gas industry gets it at 6 percent,” Mr. Comstock continued.
And once the oil companies take all these credits and deductions, what do they end up paying?
“Our effective tax rate is 41 percent as an industry on a world-wide basis,” Mr. Comstock concludes. “Royalties and lease benefits to the federal government, that’s $8 billion to $10 billion a year. We pay about $86 million a day in income tax, rents, royalties and leases, which is around $34 billion a year to the U.S. government.”
Should we eliminate loopholes, creating a simpler tax code? Sure. How about the mortgage interest deduction? That’s a loophole.
Paul Driessen, a geologist and attorney, is author of “Eco-Imperialism: Green Power, Black Death.” He addresses the “Big Oil subsidy” disinformation campaign.
“Every American manufacturing company gets tax deductions that help it create jobs and strengthen our economy — whether it produces newspapers, furniture, cars or fuel,” Mr. Driessen writes online. “Oil industry tax deductions cover costs incurred in exploration, drilling, production, transportation and refining. They aren’t subsidies or special tax breaks. … Between 1981 and 2008, the largest consolidated oil companies (‘Big Oil’) alone paid $1.95 trillion in severance, property, excise, sales and corporate income taxes, the Tax Foundation reports.”
Let’s be clear: Tax credits and deductions are not subsidies. The late Mr. Rothbard may have said it best:
“An exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. … In the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master.”