Skip to main content

Who will win Senate 'big oil' tax fight?

By Alan Silverleib, CNN
updated 1:35 PM EDT, Wed March 28, 2012
STORY HIGHLIGHTS
  • Senators are considering a bill to repeal tax breaks for the biggest oil companies
  • The Democratic measure has little chance of passing Congress
  • Critics say the bill would do nothing to lower prices and unfairly targets one industry
  • Democrats and Republicans both see a political advantage in debating the bill

Washington (CNN) -- Your pain at the pump is the U.S. Senate's top issue this week.

Senate Democrats and Republicans are arguing over a bill that would end billions in tax breaks for large oil companies -- a proposal designed to tap into voter anger over rising gas prices heading into the general election.

The Democratic-sponsored measure -- which is opposed by most conservatives and has virtually no chance of clearing Congress -- would repeal billions of dollars in subsidies currently benefitting BP, Exxon, Shell, Chevron, and ConocoPhillips. Savings would be used to renew various alternative clean energy initiatives and reduce the deficit.

Members on both sides of the aisle want to talk about the bill -- which is backed by President Barack Obama -- but for very different reasons. Democrats are trying to cast Republicans as defenders of unpopular big oil companies, while Republicans are highlighting rising pump prices under Obama's watch.

Top senators in both parties believe the issue can play to their benefit at the polls in November.

The biggest oil companies "are making money hand over fist," Senate Majority Leader Harry Reid, D-Nevada, said Monday at the start of the debate. "If Republicans continue to stand up for oil companies making record profits, one thing will be obvious: Republicans care less about bringing down gas prices than about helping big oil companies that don't need the help."

Noting that the five large companies earned $137 billion in profits last year, Reid insisted that repealing "wasteful subsidies" won't lead to a hike in oil and gas prices -- an assertion immediately dismissed by his GOP counterpart.

Democrats have proposed "raising taxes on American energy manufacturers — something common sense and basic economics tell us will lead to even higher prices at the pump," said Senate Minority Leader Mitch McConnell, R-Kentucky. "Frankly, I can't think of a better way to illustrate how completely out of touch they are on this issue."

McConnell said Republicans are using the debate "to explain how out of touch Democrats are on high gas prices."

"At a time when gas prices are at a national average of nearly $4 a gallon, this is what passes for a response to high gas prices for Washington Democrats — a bill that does nothing about it," he added Wednesday.

Democrats have repeatedly raised the issue of whether it is appropriate to provide tax subsidies for highly profitable oil and gas companies. Legislation similar to the current bill was narrowly rejected by the Senate last May.

Among other things, the new measure would end oil production's categorization under the tax code as a form of domestic manufacturing eligible for a deduction worth 6% of net income, according to New Jersey Democratic Sen. Robert Menendez, the bill's author.

The measure would also prevent oil companies from claiming foreign royalty payments as a credit against American taxes, and cut the ability of companies to deduct numerous costs associated with the drilling process.

"With oil prices over $100 per barrel, Big Oil does not need a taxpayer incentive to explore," Menendez's office asserted in a written statement.

Brian Johnson, a senior tax adviser at the American Petroleum Institute, which represents oil interests in Washington, told CNN the bill unfairly targets one industry. Among other things, he noted that many industries currently qualify for the domestic manufacturing deduction at a higher rate of 9%.

"How is this a legitimate tax deduction for Starbucks or the New York Times at 9% and somehow it's a 'subsidy' for the oil and natural gas industry at a lesser 6%? The answer is it's not," he said. "We're already penalized."

Repealing the royalty payment credit would be tantamount to double taxation and could cripple American-based operations, he argued.

"You're going to give a leg up to (Venezuelan leader) Huge Chavez, but you're going to penalize companies in Pennsylvania and North Dakota," he said.

The American Petroleum Institute announced plans this week to run radio and print ads in seven states urging people to speak out against any change that would translate to a tax hike on major producers.

"Raising taxes will not lower energy prices for American families and business," the institute's president, Jack Gerard, said in a written statement. "It's time to work together on a national energy strategy that focuses on developing all American energy resources."

A repeal of the tax breaks now under question could have a long-term impact on industry investment decisions that, in turn, eventually affect prices, according to Joseph Stanislaw, founder of J.A. Stanislaw Group, an energy and investment advisory firm.

Investors "can't plan if the tax rules keep changing," he said.

In the short term, however, bills such as the one now being pushed by Obama and congressional Democrats are unlikely to affect gas prices or change the market enough to shift voter attitudes, he argued.

"The global oil market has more impact on the presidential election than the president has on the global oil market," Stanislaw said.

Regardless, voters shouldn't expect the issue to go away anytime soon. A majority of Americans -- 54% -- believe the president can do a lot to affect gas prices, according to a recent CBS News/New York Times poll. But an even larger majority -- 66% -- blame the oil companies and Middle East turmoil for recent price spikes, a recent Bloomberg survey noted.

Only 23% blame the hike at the pump on Obama's energy policies, according to Bloomberg.

"Democrats are using this (bill) to motivate their base among environmentalists and to draw attention away from the Keystone pipeline," argued Brown University political scientist Wendy Schiller, a national political observer.

Republicans have repeatedly blasted the White House's delay of full approval for the proposed 1,700-mile pipeline expansion, which is intended to carry crude oil from Canada's oil sands to the U.S. Gulf Coast. The issue has sharply divided traditional Democratic constituencies, with labor unions backing the project and environmental groups opposing it.

Schiller also said that some Democrats would like to raise taxes on big oil companies as part of a long-term strategy to lower gas prices by encouraging the creation of a more vibrant alternative energy market.

For their part, GOP leaders are pursuing a political strategy designed to "appeal to anyone who drives a car," Schiller said. Republicans "can make the brief and simple argument that more drilling means more supply and cheaper gas. And that the Democrats' answer to everything is to raise taxes."

"It may not be accurate," she concluded. "But it is much easier to understand."

ADVERTISEMENT
ADVERTISEMENT