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Senate Moves to Bill Repealing Oil Subsidies

May 17, 2011 - by Donny Shaw

After a full week of no legislating, Senate Majority Leader Sen. Harry Reid [D, NV] has finally decided what bills to work on next. Yesterday afternoon an agreement was reached between the Democratic and Republican leadership to move to two oil-related bills — one, a Democratic proposal, that would repeal a handful of tax subsidies that benefit U.S. oil and gas companies, and the other, a Republican bill, that would require the government to conduct lease sales on offshore drilling sites. I’ve covered the House equivalent of the Republicans’ bill here, so I’ll focus on the Democrats’ bill for now.

The Close Big Oil Tax Loopholes Act was introduced by Sen. Bob Menéndez [D, NJ] and 28 other Democrats on May 10. It would repeal five tax breaks that Congress has enacted over the years to encourage oil companies to drill off of America’s shorelines, and it would close a loophole that U.S. oil companies have been using to disguise foreign royalty payments as taxes and deduct them from their domestic tax bill. The Congressional Budget Office has not published a revenue estimate for the bill yet, but a rough analysis from the Sunlight Foundation finds that oil companies benefited from nearly $4 billion in 2010.  but CRS says it would save the government $1.2 billion in 2012.

All savings under the bill would be used towards balance budgets and paying down the debt. “The net amount of any savings realized as a result of the enactment of this Act […] shall be deposited in the Treasury and used for Federal budget deficit reduction or, if there is no Federal budget deficit, for reducing the Federal debt in such manner as the Secretary of the Treasury considers appropriate,” the bill states.

The Senate Republican leader, Sen. Mitch McConnell [R, KY], has already rejected ending oil tax breaks as a way to reduce deficits, arguing that it would, “raise the price of gas at the pump, send jobs overseas and make us get even more oil from Hugo Chavez." But the non-partisan experts at the Congressional Research Service took a look at the bill last week, and they don’t agree. They concluded that any impact on the price of gasoline from ending the subsidies would be so small that it would be hard to separate from other factors impacting price.

The price of gasoline is composed of four components. The largest component of the price is crude oil, 67%, followed by federal, state, and local excise and sales taxes on gasoline sales, 13%, refining expenses, 11%, and distribution and marketing expenses, 9%. If the proposed changes in tax policy result in increases in the price of gasoline, it would generally be through an increase in the price of oil. However, the price of oil is determined on world markets and tends not to be sensitive to small cost variations experienced in regional production areas. In the recent market environment, with the price of oil averaging approximately $90 per barrel over the period December 2010 through February 2011, and the current price over $100 per barrel, prices are well in excess of costs and a small increase in taxes would be less likely to reduce oil output, and hence increase petroleum product (gasoline) prices.

They also concluded that closing the tax loophole that American oil companies that drill overseas use to limit their U.S. tax bill could lead to increased domestic oil production:

The change in the dual capacity tax payer rules might make overseas investment that leads to foreign profits less attractive to the companies than investment in the United States. This could lead the firms to enhance domestic capital spending leading to increased domestic production and reduced oil dependency.

Despite all this, the Republicans are expected to vote en masse against the bill. They will probably filibuster it in attempt to prevent it from even being brought up for debate. Why? I don’t know. But there is reason to believe they’re not being independent actors here. Over the years, congressional Republicans have taken $306 million over the years from the oil companies whose tax bills would bill increased under the bill. That’s three-times the amount Democrats have taken from the industry.

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