Congressional report: Cutting oil company tax breaks is unlikely to affect consumers

Opponents of ending tax breaks for big oil companies argue that closing tax loopholes will result in higher prices at the pump, but a report from the non-partisan Congressional Research Service finds that ending the tax breaks is unlikely to cause a rise in prices.

Senate Democrats are expected to push for a vote this week on the Close Big Oil Tax Loopholes Act of 2011, a bill to cut tax subsidies for Exxon Mobil, BP, ConocoPhillips, Shell and Chevron.

The money saved by closing these loopholes — estimated at $21 billion over 10 years — would be used to pay down the deficit.

“At a time when families are feeling the pain at the pump and our deficit keeps growing at an alarming rate, we simply can’t afford to keep giving away billions in taxpayer handouts to oil companies that are doing nothing to help lower prices,” said bill sponsor Sen. Robert Menendez (D-N.J.) “The ‘Close Big Oil Tax Loopholes Act’ is based on a simple premise: we need everyone to do their share to lower the deficit, not just working families and the elderly.”

The bill would eliminate five special oil company exemptions.

In a Senate committee hearing last week, the leaders of Exxon Mobil, BP, ConocoPhillips, Shell and Chevron called the proposal anti-completive and discriminatory and warned that it would threaten American jobs and harm innovation.

But with gas prices over $4 per gallon in much of the country, many Americans are most concerned with high fuel costs.

A report prepared for Sen. Harry Reid (D-Nev.) by the Congressional Research Service says that eliminating tax breaks for large oil companies is unlikely to have much affect on gasoline prices, because crude oil is the largest factor in the price of gas, and the price of crude oil is set by world market.

The tax changes are unlikely to affect oil output, the price of oil and, consequently, the price of gas, CRS found in an analysis of five breaks targeted by Democrats.

The Domestic Manufacturing Deduction

Oil companies get a 6 percent deduction in net income for domestic production.

Ending this would be equivalent to an increase on the tax on corporate profit, CRS said.

It is widely accepted that a proportional change in taxes on profit affects neither the firm’s incremental costs or revenues, and therefore does not change its behavior with respect to output. Since output does not change, there is little reason to believe that the price of oil, or gasoline, consumers face will increase.

The price of oil is high enough to provide incentive for continued production in the U.S, CRS said.

With current oil prices at, or near, $100 per barrel in the United States, it is unlikely that firms will slow production, or close wells as the result of the loss of the Section 199 deduction.

Intangible Drilling Costs

For nearly a century, oil and gas companies have been allowed to take immediate deductions for costs associated with exploring for oil. This was designed to enhance investment returns for financing risky exploration activities. But with oil prices high, companies don’t need incentives to explore. CRS:

Repeal of the immediate expensing of intangible drilling costs provision and replacement with a form of cost amortization more consistent with depreciation methods common in other industries likely will have no effect on current U.S. oil production, and hence no effect on current gasoline prices.

Dual Capacity Rules

Since the 1950s oil companies have been allowed to deduct the tax payments they make to other countries.

These tax payments are broadly defined, and, according to the Center for American Progress, companies have been allowed to claim credits for payments in countries that have little or no business tax.

CRS said that since elimination of this break amounts to a tax on profit it should have no effect on output or pricing decisions, and therefore no effect on the price of gasoline.

“The incidence of the tax would appear to be on shareholders.”

Oil companies are allowed to deduct a flat percentage of revenues from a well. This break is called “percentage depletion.” CRS says that it has been eliminated for most companies and should not be a factor in investment and pricing decisions by the five major oil companies.

The companies are also allowed to deduct the cost of tertiary injectants used in drilling. CRS found that the cost of ending this tax break would be very small for industry.

“[T]he five major oil companies, to which repeal would apply, earned over $32 billion in net income in the first quarter of 2011. Repeal of the [tertiary injectant] deduction for the industry is estimated by the Obama administration to yield only $6 million in revenue in 2012.”

The tax revenue generated by ending these five exemptions is expected to be 5 percent of the earnings of the largest oil companies, the report found.