Why Big Oil Should Give Up Its Tax Breaks

They barely help the bottom line, and they'll probably get killed soon anyway.

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There's some kind of help you don't really want.

The big oil companies have some stalwart protectors on Capitol Hill who make sure their longstanding tax breaks aren't threatened. Just recently, they helped kill a vote to eliminate subsidies that add up to a little more than $2 billion per year for five big oil companies. Given rising gas prices and the growing need to tackle the national debt, that's a powerful display of legislative muscle.

[See a collection of political cartoons on energy policy.]

But Big Oil might be better off giving up these perennially unpopular tax breaks. The impact on the bottom line would be minimal, and the oil companies might earn some credit for a policy shift that's in the public interest—and probably inevitable anyway.

These tax breaks were mostly established decades ago to stimulate oil drilling and production on U.S. shores. The five firms that qualify for the breaks are now among the most well-established and profitable companies in the world. Two of them--BP and Royal Dutch Shell--aren't even American companies. Along with the other three--Exxon Mobil, Chevron and ConocoPhillips--the five companies combined earned $116 billion in profits in 2011. If the tax breaks were eliminated and the whole tally came straight out of the bottom line, with no offsetting savings, the total decline in profits would be a paltry 1.8 percent.

[Read how a war with Iran could cause $7 gas.]

Most economists disagree with Republicans such as Senate Minority Leader Mitch McConnell, who says that killing the tax breaks would raise pump prices for motorists. With oil selling well over $100 per barrel, oil companies are making a profit on virtually all the oil they pull from the ground. So there would be no reason to cut back on supply because of a small change in their tax status. Oil and gasoline prices are set by global supply and demand—not by tax policies in any one country—so American drivers would probably feel none of the impact from a slightly higher tax rate on oil companies.

Besides, the tax breaks will probably be killed over the next couple of years no matter what happens to oil prices. Republicans and Democrats are converging toward the view that with Washington in so much debt, corporate giveaways that once went largely unnoticed can no longer continue. One key Republican, House Budget Committee Chairman Paul Ryan, says the oil subsidies should go, and he's likely to gain adherents if he presses the case.

[Read why high gas prices may help Obama.]

But nobody in Washington gives something up without trying to get something in return. That means the tax breaks will probably be a bargaining chip in a big battle over corporate tax reform, which could come as early as next year. Many people of both parties think the U.S corporate tax rate of 35 percent—one of the highest among developed countries—needs to come down. Even President Obama has said he'd consider a lower corporate tax rate if reforms included fewer loopholes and subsidies. So getting rid of the Big Oil tax breaks might be part of a tradeoff that includes lower overall rates.

The CEOs of Exxon, Chevron and the other oil giants certainly know all this, and they could get on the right side of public opinion by asking Congress to kindly eliminate these favorable and controversial tax treatments. CEOs have a fiduciary obligation to shareholders to protect profits and maximize the value of their stock, but they could easily argue that without favored treatment from Congress, the ritual of vilifying the oil companies every time the tax breaks come up for a vote would finally end. That would seemingly improve their long-term prospects, and Americans might even be grateful for a break in the hostilities.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman.