Comes Now The Taxman
A Post Guaranteed Not To Give You The Warm Fuzzies
By Pejman Yousefzadeh Posted in Energy | Featured Stories — Comments (10) / Email this page » / Leave a comment »
Who is actually surprised by this? (Read on.)
House Democrats are targeting billions of dollars in oil company tax breaks for quick repeal next year. A broader energy proposal that would boost alternative energy sources and conservation is expected to be put off until later.
Hot-button issues such as a tax on the oil industry's windfall profits or sharp increases in automobile fuel economy probably will not gain much ground given the narrow Democratic majorities in the House and Senate.
Incoming House Speaker Nancy Pelosi, in an outline of priorities over the first 100 hours of the next Congress in January, promises to begin a move toward greater energy independence "by rolling back the multibillion dollar subsidies for Big Oil."
One struggles, of course, to understand how tax breaks that are employed to give oil companies incentives to engage in "refinery expansion" and "geological studies" and "domestic manufacturing" amount to "subsidies." But the incoming majority does not care so much about policy exactitude. Rather, they care about using the opportunity to demonize "Big Oil" through the implementation of poorly thought-out tax policies that will only serve to take away any incentive for oil companies to engage in exploration and manufacturing. All of this is being done in the name of cultivating alternative energy sources, and in theory, I am fine and good with the cultivation of alternative energy sources. But those sources will not appear overnight and oil will be needed in the meantime to provide for the nation's energy needs.
But don't tell any of this to the incoming majority. They are too busy demagoging the issue to concern themselves about policy niceties. Amusingly, of course, we can expect that when shortages occur because of the disincentives that the incoming majority intends to introduce, and prices at the pump are commensurately increased, the incoming majority will then complain that the oil companies are engaged in "price-gouging." And interestingly enough, the story notes that Democrats will craft laws against price-gouging, which is akin to crafting laws intended to outlaw the existence of the Tooth Fairy.
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Comes Now The Taxman 10 Comments (0 topical, 10 editorial, 0 hidden) Post a comment »
"One struggles, of course, to understand how tax breaks that are employed to give oil companies incentives to engage in "refinery expansion" and "geological studies" and "domestic manufacturing" amount to "subsidies.""
One only struggles with such things if one is incapable of looking past the form to the substance. A 10% tax credit on your tax return for the costs of widget-making is no different than a 10% direct subsidy from the Commerce Department for the costs of widget-making. Arguing otherwise requires a sole focus on the direction of the cash flows, but in fact the two policies are economically identical. They both distort the allocation of resources by providing non-neutral treatment for a government-favored activity. Principled conservatives such as Senate Budget Committee Chairman Judd Gregg, as well as fellow New Hampshire Senator John Sununu, have correctly called such targeted tax breaks "tax-code socialism."
Just because a policy reduces revenue doesn't mean it shrinks government. Inudstry-specific tax breaks are no different than subsidies. They both offend free market principles. On this one, the Democrats get credit on the theory that even a broken clock is right twice a day.
And all the EPA red tape and having to endlessly fight the environmentalists in court to build a refinery anywhere in the US doesn't "distort the allocation of resources" already? The idea behind the tax breaks is to help correct for the distortions that are already there. Their purpose is to make refining on US soil a desirable business to get into... something it hasn't been in the past. That would be why we don't build refineries in this country any more. There are a lot of businesses we've simply ceded to the rest of the world because of our excessive regulation.
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"I am a great believer in luck. The harder I work, the more I have of it." -- Thomas Jefferson
So are you saying that tax breaks for oil are a second-best solution to correct for overregulation because we can't achieve the first-best solution, which is to deregulate? That's pretty rough justice, if you ask me. The beneficiaries of the tax breaks and the victims of the overregulation do not necessarily match up well. That's because the beneficiaries of tax breaks like percentage depletion and expensing of intangible drilling costs are likely oil company shareholders, whereas victims of overregulation are consumers. The shareholders don't necessarily suffer from the regulations because artificially constricted supply pushes up profit margins and regulatory costs raise barriers to entry, thus limiting competition.
So are you saying that tax breaks for oil are a second-best solution to correct for overregulation because we can't achieve the first-best solution, which is to deregulate?
Pretty much. Nobody elected me king so I guess we'll have to take what we can get. The tax breaks are a heck of a lot easier than dealing with the other issues.
The beneficiaries of the tax breaks and the victims of the overregulation do not necessarily match up well.
Since these tax breaks in particular are tied to refinery expansion and construction, I'd say they exactly match up. I'm not a huge fan of subsidies and tax breaks in principal, but there are places where they can make sense and this might be one of them. There are strategic reasons to want ample refinery capacity within our borders.
That's because the beneficiaries of tax breaks like percentage depletion and expensing of intangible drilling costs are likely oil company shareholders, whereas victims of overregulation are consumers.
This makes no sense. You don't think shareholders have an interest in finding new places to earn an investment on their capital? That's one of the big problems with the large integrated oil companies today... they don't have a ton of good places they can reinvest their capital. Any changes to the law that bring back areas as viable enterprises to invest in are good for the shareholder.
If we have more refinery capacity, that will benefit the consumer by lower prices and more stable fuel prices. If we sit by and let refinery capacity continue to stagnate, the market will become more and more susceptible to supply shocks, and as a result, more volatile and consumers will pay the price on their energy bills.
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"I am a great believer in luck. The harder I work, the more I have of it." -- Thomas Jefferson
Lobbyists for narrow interests come up with nice sounding slogans for what is nothing more than pork dispensed through the tax code. You take these slogans at face value; I do not. We Republicans have been passing tax bills for years with titles that include phrases like "economic growth" and "job creation," regardless of whether the particular tax policies are pro-growth or pro-jobs. Likewise, just because a lobbyist convinces a congressional staffer to name a tax break for "refinery expansion" or "domestic production" doesn't make it so. You might be surprised to know, for instance, that the domestic production deduction applies to things like Hollywood movies (although there's an anti-porn exception).
Also, as a general matter, I don't generally support the policy of "correcting" for one distortion (regulations) by creating additional distortions (tax breaks). The problem is these additional distortions have ramifcations throughout the economy. Piling distortion on top of distortion is how we got the 1970s.
And anyway, what industry doesn't claim that it needs favorable treatment from the government to correct for unfavorable treatment from the government? Every few years automakers claim that EPA regs justify tariffs on Japanese imports. I could cite a gazillion other examples of special pleading based on some perceived injustice. Very rarely is that special pleading meritorious.
Very rarely is that special pleading meritorious.
All you have to do is look at the ample evidence to show that it is in this case. How many new refineries have been built in the past 20+ years? What has happened to our ability to supply refined products versus the demand for the same?
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"I am a great believer in luck. The harder I work, the more I have of it." -- Thomas Jefferson
Although it's fun to portray Democrats as economically insipid, I think they understand the consequences of ending tax breaks for oil companies just fine. The oil companies will continue their efforts to explore new resources and increase their refinery capacities unabated without tax incentives; they'll just pass the entire cost on to the consumer rather than letting the government pick up part of the tab. This will drive the cost of gasoline up, which (despite all the Democrats' whining about how much it hurts the average family) is perfectly fine with them. Democrats think gas prices should be higher, even up to European levels, to discourage consumption and increase conservation. Passing a higher gas tax is impossible politically, but removing tax breaks that force gas prices to go up accomplishes the exact same thing without voters/taxpayers getting outraged.
Personally, I'm okay with eliminating these tax breaks for oil companies because I generally think the cost of goods should be paid by the consumer, not the government.
It's still an increase in price for the end user, but the following isn't necessarily true:
The oil companies will continue their efforts to explore new resources and increase their refinery capacities unabated without tax incentives;
They'll do it if it makes economic sense. It is very likely it does not make economic sense to build refinery capacity in the US without tax incentives, because of all the environmentalist roadblocks, the political menacing every time refinery margins are fat, the historically lousy rate of return, the high regulatory risk, and the extremely capital intensive nature of the business.
It is likely any refineries that are built in the future will continue to be built overseas. This makes our supply of refined products much less stable and secure. It's also much harder (almost impossible) to adequately stockpile refined fuels. Many have a limited shelf-life and there are so many different refinery outputs that would all need their own stockpiles. Our current strategic stockpile consists of crude oil. That's great, but it does nobody any good unless there's enough refining capacity to turn it into something useful.
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"I am a great believer in luck. The harder I work, the more I have of it." -- Thomas Jefferson
FairTax would remove these politics altogether since no company would pay any Corporate Income Tax. Government would not use the Tax Code to pick winners and losers. Only consumers would pay tax on their purchases.
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Eliminate the IRS and all payroll taxes! http://www.fairtax.org
Once again the Democrats demonstrate their in depth knowledge of that wondrous adage of social, political, and economic engineering: "If you want less of something, tax it. If you want more of something, subsidize it."
Wondrous things they were in their time, the Carter gas lines.