Americans for Prosperity, a national political organization that claims to uphold libertarian values, is showing its true intentions: Protect government support of fossil fuel interests.
Founded and partly funded by the oil billionaire Koch Brothers, AFP has become a leading organizer of the Tea Party. The organization has thrown millions of dollars behind national ads attacking clean energy that fact checkers have called “ultimately ridiculous.” (Even more ridiculous, AFP recently bussed in protesters to picket a small event where kids were flying kites on the beach in support of wind power).
Given AFP’s ties to the oil industry and its blatant disdain for renewable energy, its latest campaign to end a key tax credit for wind shouldn’t come as a surprise to anyone who follows the group. But what’s truly remarkable about AFP’s latest effort to kill wind tax credits is the mind-bending contradiction between its stance on renewable energy tax policy and fossil fuel tax policy.
Here’s an excerpt from a letter on the wind tax credit sent to members of Congress by AFP and a large group of other conservative organizations yesterday:
This special provision continues the deplorable practice of using the tax code to favor certain groups over others. Whenever the government protects a particular industry, as it has with wind energy production, the industry tends to remain dependent on it.
It is time to end special tax provisions that distort the energy market and increase energy prices. We urge you to let the wasteful wind PTC expire as planned at the end of the year.
So an organization trying to limit government spending and create a “free market” would surely support doing the same thing for the tens of billions of dollars in special tax incentives for the fossil fuel industry, right? Not a chance.
Here’s AFP’s official stance on tax policy for fossil fuel companies:
AFP opposes using the tax code to attack oil and natural gas producers that are simply using the same tax deductions that are broadly available to everyone else, just because these energy producers are politically unpopular.
Using the same tax deductions as everyone else? Not exactly. Yes, oil and gas companies take advantage of many of the same tax provisions offered to other industries. But as Seth Hanlon, Director of Fiscal Reform at the Center for American Progress recently pointed out, there many that apply specifically to fossil fuel producers:
Percentage depletion ($11.2 billion over 10 years)
Companies are generally allowed to deduct the costs of an investment over the term of that investment’s useful life. But oil companies get to use a special method for calculating their deductions called “percentage depletion.” Instead of deducting the costs of an oil or gas well as its value declines, oil companies are allowed to deduct a flat percentage of the income they derive from it. Because the deductions are based on revenues, not costs, the subsidy actually increases at times when prices are high, which of course is when oil companies enjoy their greatest profits.
The oil and gas industry maintains that this is not a special tax break because other companies receive similar deductions. But the percentage depletion method permitted for oil and gas is fundamentally different and more favorable. In some cases, it can eliminate all federal taxes for these companies. Moreover, percentage depletion is a poorly designed subsidy because it “doesn’t specifically target hard-to-find or difficult-to-extract oil,” as CAP’s Richard Caperton and Sima Gandhi have written.
Domestic manufacturing deduction for oil production ($18.2 billion over 10 years)
Oil producers successfully lobbied for inclusion in a 2004 bill that gave the beleaguered manufacturing sector a special tax break designed to discourage outsourcing of jobs. For a number of reasons—including the capital-intensive nature of oil production, the relative mobility of investments, and of course the level of profitability—there are vast differences between the oil industry and traditional U.S. manufacturing. As Sen. Bob Corker, a Tennessee Republican, has explained: “Congress was trying to solve a manufacturing issue in this country” by enacting the deduction and included oil producers “almost inadvertently.”
Whatever rationale there was for allowing oil producers to claim the manufacturing deduction has evaporated in the intervening time, as oil prices have nearly tripled. Eliminating oil producers from a benefit never intended for them “will have no effect on consumer prices for gasoline and natural gas in the immediate future,” and is unlikely to have any effect over the long run, according to a recent report by Congress’s Joint Economic Committee.
Expensing of intangible drilling costs ($12.5 billion over 10 years)
Another special tax rule dating back to 1916 permits independent oil companies (and major integrated oil companies to a lesser but still significant extent) to “expense” certain costs associated with drilling oil wells. This means they can take immediate deductions for these costs rather than spreading the deductions out over the useful life of the wells, which is the normal tax code rule for other types of investments. Taking deductions immediately means the companies lower their tax bill in the first year, in effect getting an interest-free loan from the government.
“Dual capacity taxpayer” rules for claiming foreign tax credits ($10.8 billion over 10 years)
Our tax system allows companies that do business abroad to reduce from their tax bill any income taxes paid to other governments. The rules are supposed to prevent oil companies from claiming credit for royalty payments to foreign governments. Royalties are not taxes; they are fees for the privilege of extracting natural resources.
Notwithstanding these rules, so-called “dual capacity taxpayers,” which are overwhelmingly oil companies, have been permitted to claim credits for certain payments to foreign governments, even in countries that generally impose low or no business tax (suggesting that these payments, or levies, are in fact a form of royalty). Dual capacity taxpayer rules, therefore, are a subsidy for foreign production by U.S. oil companies. President Obama and others have proposed limiting the tax credit for these companies to what it would be if they did not have the special “dual capacity taxpayer” status.
Amortization of geological and geophysical expenditures ($1.4 billion over 10 years)
Another way many oil producers get to postpone their tax liability is by writing off the costs of searching for oil over an accelerated time period of two years. The president has proposed that all oil companies write off these costs over seven years, a relatively minor tax change that would have a negligible impact on investment decisions. According to the Congressional Research Service: “If the industry were experiencing a time of stagnant oil prices that were near the cost of production, relatively small changes in tax expenses might affect investment and production activities. However, in a time of high and volatile oil prices, small changes in tax expense are overshadowed by price variations.”
“Last-in, first-out” accounting for oil companies (as much as $22.5 billion over 10 years)
A tax accounting method known as “last in, first out,” or LIFO, provides a significant tax benefit for oil companies, especially when prices are rising. LIFO allows oil companies to calculate profits based on the cost of the oil they most recently added to their inventory. Since the most recently acquired inventory costs the most when prices are rising, this method can minimize a company’s taxable income. LIFO is available to businesses in other industries but large oil companies are perhaps the biggest beneficiaries.
Many of the tax provisions for oil companies are permanently embedded in the tax code. Tax credits for wind and other renewables are temporary, often renewed for only a couple years at a time.
We see this over and over again: Self-proclaimed energy free-marketeers label government support of emerging renewable energy technologies “deplorable,” but look the other way when the government provides special treatment for the fossil fuel industry. Paul Ryan and Mitt Romney have jumped on the bandwagon as well. Both men say they support ending the wind tax credit — even while supporting billions of dollars in tax support for highly-profitable oil companies. Paul Ryan’s “austerity” budget even preserves these tax breaks.
These contradictory arguments around energy are a major part of the presidential campaign. Journalists should be prepared to confront the candidates and organizations like AFP when they make such brazenly hypocritical claims.