HUFBAUER: Debunking the big-oil subsidy myth

Energy companies receive same tax treatment as other manufacturers

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The late Sen. Daniel Patrick Moynihan used to warn against “semantic infiltration” - employing less-than-accurate words in an effort to shape the debate. Moynihan’s caution is often ignored, but it’s still worth calling out the offenders. Among them is a favorite think tank of the Obama administration, the Center for American Progress (CAP), which regularly insists that taxpayers are “subsidizing big oil companies.”

That’s simply not true.

U.S. energy companies, specifically those in the oil business, are eligible for the same tax treatment as other U.S. industries. To understand this, it’s important to take a close look at the words being used.

CAP shrewdly - but inaccurately - conflates two completely different terms in public finance: subsidy and deduction. A subsidy is a payment made by the government, usually to promote the prospects of a specific technology or action - be it solar energy, ethanol or something else. Subsidies are often equated with handouts - a derisory term for sure.

A business deduction, on the other hand, is designed to ensure that a firm is taxed only on its net income. Deductions allow businesses to write off legitimate expenses from gross revenue to calculate net income. Deductions are widely regarded as proper in a system that taxes income, not revenue.

Properly defined, subsidies and deductions are as different as apples and oranges.

That hasn’t stopped President Obama, Democrats in Congress and even some Republicans from semantic infiltration. For example, Rep. Reid J. Ribble, a first-term Wisconsin Republican, fell into the rhetorical trap when he called deductions for oil companies a “federal subsidy” just last month.

His statement takes us to another important point: Many lawmakers routinely accuse oil and gas companies of dodging their “fair share” of taxes even though those U.S. companies use the same tax provisions that are available to all U.S. manufacturers.

Specifically, some lawmakers bemoan the oil and gas industry’s access to the domestic manufacturing deduction - commonly referred to as Section 199 - which was enacted as a means of keeping jobs in the United States. The deduction cuts the applicable corporate tax rate by about 2 percentage points on manufacturing income broadly defined and is used by a wide range of businesses. There is no reason Section 199 should not be available for refining and processing petroleum products.

Also, some lawmakers seek to alter a provision of the tax code that allows American oil and gas companies operating overseas, like all other U.S. companies, to take a credit for taxes paid to foreign governments in computing their domestic tax bill. This provision prevents American companies from being taxed twice on the same income and enables them to compete on roughly the same tax terms as foreign-owned companies. Again, this is not a subsidy.

The semantically accurate way to describe legislation that would eliminate the manufacturing deduction or curtail the foreign tax credit for oil and gas companies is straightforward: the imposition of tax discrimination, not the removal of federal subsidies. Because most Americans agree that tax discrimination is bad policy - Uncle Sam shouldn’t be picking winners and losers through the tax code - accurate language would diminish enthusiasm for these proposals.

Lawmakers must debate tax and spending policy. In fact, this promises to be the center-stage legislative show of 2013. But the debate should use honest terms in which up is up, down is down, and deductions and subsidies aren’t the same.

Gary Clyde Hufbauer, senior fellow at the Peterson Institute for International Economics, served in the Treasury Department as an international tax expert under Presidents Nixon and Ford.

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