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Why Oil Tax Breaks Are So Special

Rising gasoline prices are one of those phenomena that create massive voter angst but which politicians can't do anything to address at all in the short run, and can only marginally effect in the long run. But voters don't understand that, which means politicians have to come up with a policy response -- anything at all, and ideally something that puts the other party on the defensive.

The Senate Democrats' plan to roll back targeted tax breaks for oil companies is 100% the product of their desire to have to talk about in response to voter dismay at rising gasoline prices, and 0% the product of a sudden desire to reform the tax code. On the other hand, it's actually sensible tax policy:

The break, adopted in 2004 to stimulate job growth by trimming tax rates for a range of manufacturers, gives oil companies and other manufacturers a top rate of about 32 percent instead of 35 percent. It is the biggest single budget item; its repeal would save $18 billion. Other oil company tax breaks are decades old.

The background here is that Congress in 2004 was forced by the World Trade Organization to repeal an export subsidy. Rather than devote the proceeds to reducing the deficit, or to lowering tax rates across the board, the GOP leadership instead decided to hand out a bouquet of targeted tax breaks. The result was one of the greatest lobbying free-for-alls in American history, with special tax breaks for nearly anybody that asked. One element of the law was a tax break for manufacturers, which is a stupid idea, and the subsequent decision to expand the definition of "manufacturing" to its breaking point, so as to include any industry with sufficient lobbying clout, the oil industry included.

That's what you need to keep in mind when you read the industry's complaints:

Oil companies complain that they are being unfairly targeted while other businesses enjoy similar tax benefits.
“Targeting a specific industry or even a segment of that industry is what we would consider punitive and unfair tax policy, and it is not going to get us increased energy security, increased employment and certainly not going to lower the price of gasoline,” said Charles Drevna, president of the National Petrochemical and Refiners Association.

Obviously, they had no complaint about being singled out when they were being singled out for special breaks. Now that the singling out is working against them, they've suddenly adopted a purist view of tax reform.

Meanwhile, Harold Ford takes to the Wall Street Journal op-ed page to defend the honor, and favored tax status, of the oil industry:

And characterizing legitimate tax credits as "subsidies" or "loopholes" only distracts from substantive treatment of these issues. Lawmakers misrepresent the facts when they call the manufacturing deduction known as Section 199—passed by Congress in 2004 to spur domestic job growth—a "subsidy" for oil and gas firms. The truth is that all U.S. manufacturers, from software producers to filmmakers and coffee roasters, are eligible for this deduction.

Do you think of film-makers, coffee roasters, and oil extractors as "manufacturers"? Neither do I. Ford is using the senseless promiscuity of the tax break as a defense of its continued existence. Surprisingly, Ford's lobbying firm does not currently list any oil firms among its clientele. But I would read today's op-ed as an open solicitation for their business.