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Massive Subsidies to Big Oil are Ongoing

by Leon Kunstenaar
Welfare to fossil fuel industry costs taxpayers $20 billion a year and is a major contributor to global warming.
As the environmental movement targets the financing Wells Fargo, Chase, Citybank, and other large banks do that enables the fossil fuel industry, the US government continues its massive subsidies of the fossil fuel extractive industry. Flying under the radar of the perception of most people are a web of arcane tax regulations that effectively propagate a class of ultra wealthy government welfare recipients who are also major contributors to the earth's climate disaster.

Here are the four main kinds of subsidies that are costing U.S. taxpayers $20 billion a year.

Tax Expenditures:
There are tax expenditures in which the federal government allows oil companies to deduct taxes during the oil-well development process. A prime example of this is the $2.3 billion Intangible Drilling Oil & Gas Cost Deduction that allows producers to deduct 100 percent of expenses that aren’t directly linked to the final operation of an oil well in the year they are incurred.

Another notable example is the Last-In, First Out Accounting for Fossil Fuel Companies subsidy that allows oil companies to undervalue their inventory, reducing their amount of taxable income on the books and taking $1.5 billion out of federal coffers each year. This accounting trick that allows companies to reduce their tax bills by selling off the most expensive fossil fuel reserves first, artificially reduces the inventory on which they pay taxes by an estimated $1.7 billion per year.

Fossil fuel companies get a tax credit for taxes paid to foreign countries. Called the "Dual Capacity Tax Preference", U.S. taxpayers subsidize Big Oil’s production of foreign oil. These companies reduce their taxes by disguising royalty payments to foreign governments as taxes. Also, one can just imagine the private "arragements" possible in which oil companies could divert local expenditures (equipment, labor, etc.) through local governments as "taxes".

Direct spending subsidies:
These are the direct spending subsidies, such as the $229 million Inland Waters Transport for Petroleum sbsidy. Usually, the federal government taxes shipping company using waterways a fee proportionate to the tonnage of what they ship. Not so with oil companies.

Similar to this is the $107 million "Inadequate Administrative Fees for Onshore Drilling Management subsidy" that leaves taxpayers holding the bag for Bureau of Land Management costs associated with drilling that would otherwise be covered by the industry.

Royalty Relief subsidies:
These are subsidies, where oil companies carve out exemptions for themselves— usually with the help of lawmakers to pay significantly lower royalties rates on the oil and gas they extract. Note who the top recipient is, none other than our favorite Senator of current fame Joe Manchin who tops the list of fossil fuel company largess recipients at $179,450.

For example, the Lost Royalties on Offshore Drilling for Leases Issued from 1996 through 2000 subsidy came as a result of the 1995 “Outer Continental Shelf Deep Water Royalty Relief Act,” something that to this day deprives taxpayers of $1.1 billion each year.

Regulatory subsidies:
H.R.2184 has been introduced in the House, the End Oil and Gas Tax Subsidies Act of 2021. It provides for:
  • increases to seven years the amortization period for geological and geophysical expenditures;
  • repeals the tax credits for producing oil and gas from marginal wells and for enhanced oil recovery;
  • repeals the tax deduction for the intangible drilling and development costs of oil and gas wells;
  • repeals percentage depletion
  • repeals the tax deduction for tertiary injectant expenses;
  • repeals the passive loss exception for working interests in oil and gas property;
  • denies the tax deduction for income attributable to domestic production activities for oil and gas activities;
  • prohibits the use of the last-in, first-out (LIFO) accounting method by major integrated oil companies;
  • limits the foreign tax credit for dual capacity taxpayers (i.e., taxpayers who are subject to a levy of a foreign country or U.S. possession and receive specific economic benefits from such country or possession); and
  • expands the definition of crude oil for purposes of the excise tax on petroleum and petroleum products to include any oil derived from a bitumen or bituminous mixture (tar sands), and any oil derived from kerogen-bearing sources (oil shale).
Active support for the pasage of this bill should be added to the demands made on President Biden during this week of environmental protest. It would be a start.

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