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John E. Sununu

Wasting time on oil company taxes

By John E. Sununu
May 9, 2011

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NOTHING PANICS politicians like $4 a gallon gas. In June 2006, one nervous colleague claimed that two new ethanol plants would cause the price of oil — then pushing $75 per barrel — to “drop like a rock.’’ I couldn’t help but feel responsible for delivering the bad news: “Unfortunately, that’s crazy talk. It can’t possibly be in anyone’s interest to make statements like that in public.’’ He didn’t take it well.

Today, with prices at the pump bobbing near all-time highs and the summer driving months ahead, the smell of fear is wafting through Capitol hallways again.

The cycle started with April’s earnings reports from energy giants like Chevron, Conoco-Philips, and, of course, ExxonMobil. As the world’s largest corporation, Exxon’s numbers are guaranteed to be eye-popping — an easy mark for breathless reporters, politicians, and perennial fossil fuel critics. Their voices carry a special tone of disdain reserved for the energy industry and for Exxon, in particular. No one likes high prices, and critics simply can’t resist the opportunity to demagogue the toxic combination of high gas prices, multi-billion dollar profits, and oil company “tax breaks’’ that sound indefensible.

The precise point at which a tax deduction becomes a “loophole’’ or a tax incentive becomes a “subsidy for special interests’’ is one of the great mysteries of politics. Perhaps it is best defined in terms Justice Potter Stewart reserved for pornography, “I know it when I see it.’’ Judging by some of the rhetoric, any provision related to the oil industry crossed the line long, long ago. The only problem is that on careful inspection, some of these “special interest’’ tax breaks just don’t look very special.

President Obama called for eliminating “over $4 billion per year’’ in oil company benefits (and spending the proceeds on energy subsidies he likes). The largest of four main targets is called the manufacturers tax credit because — surprise — it’s available to every manufacturer in the United States. Redefining “manufacturer’’ to exclude oil and gas companies would raise their taxes by $1.7 billion per year. (Full disclosure: I was one of a handful of senators who opposed the creation of this tax credit in 2005.) Maybe energy producers shouldn’t count as “real’’ manufacturers; better yet, maybe we shouldn’t have one tax system for manufacturers and another for everyone else.

The second target is the foreign tax credit, available not just to manufacturers, but to every American company doing business overseas. The government gives a credit for taxes paid to foreign governments. Some politicians think we should take this away from energy companies, raising $800 million in taxes; some think we should take it away from every company — effectively taxing them twice. But it strains credibility to call it a “special’’ break for oil companies.

The final two provisions are somewhat unique to energy activities, but are hardly recent inventions. Oil depletion rules let energy producers write down the value of the oil in the ground just as firms would depreciate the value of any capital asset. Energy companies can also expense — rather than depreciate over time — certain exploration costs like engineering and wells that don’t pan out. Changing these accounting rules, which trace their roots to the 1920s, could raise taxes another $1.8 billion.

All-in, the grand total of $4.3 billion would have a pretty modest impact on the $1.6 trillion deficit. Should the president succeed in spending the proceeds, the effect on the deficit would be precisely zero. Under no circumstance will higher tax revenues lower prices at the pump, but it’s more than enough to stoke the boilers of political rhetoric.

So where does all of this leave Harry Reid, who has promised a vote on these tax changes? Eliminating the manufacturers tax credit would probably pass the Senate, as might repealing the foreign credit. These would be considered “free votes’’ since senators know that identical legislation would never see the light of day in the House. But repealing the deduction for depleting wells and drilling expenses is another matter altogether. It puts Democratic seats in energy and mining states like New Mexico, Montana, and West Virginia at risk.

It’s also a distraction from the larger issue of addressing the unsustainable cost of entitlement programs. Ultimately, that’s the reason that both Speaker John Boehner and House Budget Committee Chair Paul Ryan said they are “willing to look at’’ the tax laws in question. They remain open to a larger deal that could easily include a few changes in these areas.

But for now, each side will dig in, deploy their best rhetoric, and orchestrate a few votes for show. For the hard-liners on both sides, the real threat is losing the issue as part of a budget deal during the next six weeks. Barring that, when Congress departs for July 4th, a summer filled with hype over ethanol plants, hydrogen cars, and bullet trains awaits us all. If cars ran on crazy talk, we’d all drive for free.

John E. Sununu, a regular Globe contributor, is a former US senator from New Hampshire.