Science Rant, Not politics: Can CO2 cause "Climate Change?"

[easyrider16]

They are long articles. Here's a shorter article that does a good job of explaining some of the oil subsidies we're talking about. It also address some of the accelerated depreciation benefits available to oil and gas companies.
https://www.taxpolicycenter.org/briefin ... ssil-fuels

Relevant part:

Tax subsidies for oil, gas and coal development are expected to reduce federal revenue by $11.5 billion from 2019 to 2023 (figure 1). The two largest subsidies are excess of percentage over cost depletion ($3 billion) and expensing of exploration and development costs ($2.7 billion).

Excess of percentage over cost depletion allows producers to deduct a fixed percentage of gross revenue as capital expenses each year, without regard to how much they have invested. By contrast, conventional cost depletion allows deduction of actual costs as the resources from a well or mine are depleted. Federal tax law allows independent producers—but not integrated companies—to deduct 15 percent of gross revenue from their oil and gas properties as percentage depletion.

Exploration and development costs include labor and materials needed for drilling and developing oil and gas wells and coal mines. Independent oil and gas producers (i.e., those without related refining and marketing operations) may deduct these costs from income in the year incurred, even though, as capital investments, they produce returns over many years. Integrated oil and gas companies may deduct 70 percent of these costs in the first year and recover the remaining 30 percent over the next five years.

Other tax subsidies for fossil fuels include: Publicly traded partnerships, which allow pass-through oil and gas partnerships to publicly list their shares (a privilege generally reserved for higher-taxed C-corporations); amortization of geological and geophysical expenditures associated with oil and gas exploration; accelerated depreciation of natural gas infrastructure; investment credits for clean coal facilities; and energy production credits for coal.

[easyrider16]

So why do you feel it necessary to state 56 billion?

To illustrate the benefit to the company. If we were talking about a start-up without any profit, there wouldn't be much benefit. But to a company that earns billions of dollars each year, favorable tax provisions are a big deal. All of the major oil companies make billions each year, so this favorable tax treatment means a lot of money. Meaning, it's not a small subsidy.

And you're aware of other industries that have different parts of the tax code due to different natures of their business?

Not sure what your point is here.

Lastly, why was accelerated depreciation written into the tax code? (Hint: It's not so rich guys get richer)

I assume you have an answer? If you want me to guess, I'd guess it's to encourage investment in new oil wells. Not sure how it's relevant to the question of whether or not it's a subsidy. There might be a truly good reason for it, but that doesn't mean it's not a subsidy.

[Rez]

To argue that tax credits and/or tax deductions are not the same thing as direct subsidies misses the point. A direct subsidy is simply a more direct form of subsidization than credits or deductions. Both are designed and implemented to encourage specific behaviors and decisions on the part of consumers and businesses. In the end, all are subsidies.

They're not the same for the reason you stated. The EV/PV subsidies are much more significant direct subsidies than anything the fossil fuel industry gets. The tax credits (up to $7500 for the purchase of an EV) is a huge bonus to the EV industry and to those who are wealthy enough to buy an EV. That means somebody who can afford to buy an EV gets up to $7500 back on the purchase price. It doesn't take a rocket scientist to understand that this allows EV car manufacturers to make more profit, like a lot more profit. No such fossil fuel subsidies that one might argue are direct (and I'd debate that some of these subsidies aren't really direct or fossil fuel specific) are as beneficial as the renewable energy direct subsidies which are about as "direct" as you can get. U.S. taxpayers, all of us, are heavily subsidizing an industry, EV, that today caters to small percentage of taxpayers (those that can afford EV's even after the tax credit). And on top of this are some good arguments that the environmental impact of EVs vs ICEV's may not even be in favor of EV's.

[easyrider16]

So what are your thoughts on all these articles that I posted above that all claim the oil industry is getting on the order of $2-3 billion in tax breaks annually? Are they wrong?

By comparison, a quick search reveals the CBO estimates the EV credits will cost about $85 million in 2023.
https://www.reuters.com/business/autos- ... 022-08-03/

[Rez]

"Exploration and development costs include labor and materials needed for drilling and developing oil and gas wells and coal mines. Independent oil and gas producers (i.e., those without related refining and marketing operations) may deduct these costs from income in the year incurred, even though, as capital investments, they produce returns over many years. Integrated oil and gas companies may deduct 70 percent of these costs in the first year and recover the remaining 30 percent over the next five years."

Why wouldn't labor and materials needed for drilling and developing oil and gas wells and coal mines be considered an operating expense and be fully deductible in the year incurred? How is labor and materials considered a capital investment? I"m assuming "materials" isn't "equipment" but some sort of consumable. If some company goes to a tradeshow to try to find new business do you think they write off the cost of the marketing and sales people who they sent, their travel costs and the cost of the marketing materials they brought to the show?

Just because somebody says something is a "fossil fuel subsidy" doesn't mean it is a subsidy (tax write off) that is unique to the fossil fuel industry. When you examine these things more closely you find out that they are "subsidies" offered to many different industries. The EV/PV subsidies are very direct and very specific to the renewable/green/EV industry. As in, you buy this product and you get a very large tax credit against the purchase price. Not tax deduction, a tax credit. There is no comparison between what the EV/PV industry is getting in terms of subsidies and the ones that many claim the fossil fuel industry gets. People with an agenda try to argue otherwise.

[Bubba]

OK…arguing about whether something specific is or isn’t a subsidy still misses the point. All of them, whether tax credits, tax deductions, direct purchase price reduction, all of them are subsidies of one sort of another. If we didn’t choose to subsidize certain behaviors, we would eliminate them all and have a flat tax with no deductions or credits of any kind.

[easyrider16]

Why wouldn't labor and materials needed for drilling and developing oil and gas wells and coal mines be considered an operating expense and be fully deductible in the year incurred?

I'm not sure on the specifics of the accounting, but I would guess that these costs are not considered normal operating expenses. For example if you hired a contractor to improve a building your business operates out of, all the labor and materials relating to that work would be a capital expense not an operating expense. Similarly, investments in R&D, both labor and materials, would normally be capital expenses. I imagine developing an oil well falls into the category of capital improvements and/or R&D, and thus would normally be considered a capital expense.

Just because somebody says something is a "fossil fuel subsidy" doesn't mean it is a subsidy (tax write off) that is unique to the fossil fuel industry.

There are sections of the tax code that provide deductions specific to oil and gas companies. For example, see 26 CFR § 1.263A-13 and 26 CFR § 1.612-4

From what I've read (see articles I cited above), the dollar amount of what oil companies save in taxes through these kinds of special tax provisions far exceeds money spent on EV credits. If there is any evidence that these articles are wrong, I'd like to know, as I have no agenda.

[Mister Moose]

OK…arguing about whether something specific is or isn’t a subsidy still misses the point. All of them, whether tax credits, tax deductions, direct purchase price reduction, all of them are subsidies of one sort of another. No. If we didn’t choose to subsidize certain behaviors, we would eliminate them all and have a flat tax with no deductions or credits of any kind.

A flat tax on what? Income? Isn't income gross revenue minus expenses? Are you going to argue expensing a capital purchase like a groomer is not a legitimate expense and therefore is a "subsidy of one sort or another"?

[deadheadskier]

I suppose this as good of a thread as anywhere to post this

https://thequantuminsider.com/2023/07/2 ... ey%20offer.

A world changer almost on the level of discovering electricity itself if scientists can figure it out.

[Bubba]

McClaughry: Don’t be fooled by ‘Global Average Temperature’

https://vermontbiz.com/news/2023/july/2 ... F27%2F2023

[Bubba]

OK…arguing about whether something specific is or isn’t a subsidy still misses the point. All of them, whether tax credits, tax deductions, direct purchase price reduction, all of them are subsidies of one sort of another. No. If we didn’t choose to subsidize certain behaviors, we would eliminate them all and have a flat tax with no deductions or credits of any kind.

A flat tax on what? Income? Isn't income gross revenue minus expenses? Are you going to argue expensing a capital purchase like a groomer is not a legitimate expense and therefore is a "subsidy of one sort or another"?

The choice of what constitutes a capital expenditure and what is an expense is an accounting decision (an art rather than a science). Once it is decided that something is capital, how it is treated in the tax code is a political decision, ie what to encourage via tax treatment. In other words, a subsidy of that which one wants to encourage.

[easyrider16]

Yeah, again, capital expenses are normally deducted via depreciation over the life expectancy of the capital acquired. Oil companies get a special dispensation from the government where they can elect to deduct the entire amount of capital expenditure for oil drilling/exploration all at once instead of over many years.

You can argue all you want about calling it a subsidy or not, but you can't really dispute that it is a major special benefit granted to oil companies. I'm not saying we should take it away, or that it's bad policy. But lets not be blind to what it is. It is a special benefit whose value exceeds all the EV credits paid out in any given year.

[Big Bob]

Yeah, again, capital expenses are normally deducted via depreciation over the life expectancy of the capital acquired. Oil companies get a special dispensation from the government where they can elect to deduct the entire amount of capital expenditure for oil drilling/exploration all at once instead of over many years.

You can argue all you want about calling it a subsidy or not, but you can't really dispute that it is a major special benefit granted to oil companies. I'm not saying we should take it away, or that it's bad policy. But lets not be blind to what it is. It is a special benefit whose value exceeds all the EV credits paid out in any given year.

it sounds like an accelerated rate of depreciation. They still get to deduct 100% of the cost, just over a shorter period of time. With many multiple wells being drilled each year, over time it must balance out. And they have no irea how long these wells will produce oil/ income.

[Mister Moose]

OK…arguing about whether something specific is or isn’t a subsidy still misses the point. All of them, whether tax credits, tax deductions, direct purchase price reduction, all of them are subsidies of one sort of another. No. If we didn’t choose to subsidize certain behaviors, we would eliminate them all and have a flat tax with no deductions or credits of any kind.

A flat tax on what? Income? Isn't income gross revenue minus expenses? Are you going to argue expensing a capital purchase like a groomer is not a legitimate expense and therefore is a "subsidy of one sort or another"?

The choice of what constitutes a capital expenditure and what is an expense is an accounting decision (an art rather than a science). Not really.
Once it is decided that something is capital, how it is treated in the tax code is a political decision, ie what to encourage via tax treatment. In other words, a subsidy No. of that which one wants to encourage.

In general, expenses for items that are used up in a year are expensed immediately. Buy fuel for the groomer, deduct it immediately. Expenses for large items that last a long time are (in general) not allowed to be completely expensed in the year of purchase, but the expense must be spread out to reflect the lifetime of the item. Like a truck or a groomer, or a lift. Nothing political about it.

Yeah, again, capital expenses are normally deducted via depreciation over the life expectancy of the capital acquired. Oil companies get a special dispensation from the government where they can elect to deduct the entire amount of capital expenditure for oil drilling/exploration all at once instead of over many years. Yes, but this does not make it a subsidy.

You can argue all you want about calling it a subsidy or not, but you can't really dispute that it is a major special benefit granted to oil companies. I'm not saying we should take it away, or that it's bad policy. But lets not be blind to what it is. It is a special benefit whose value exceeds all the EV credits paid out in any given year. No, it is a special method of depreciation that reflect the risk, there is no net benefit over time.

The "net benefit over time"* of all accelerated depreciation is zero. Depreciation is just a timeline (greater than one year) of expensing large purchases. It affects cash flow, ie deduct me now or deduct me later. The total deduction over time is still the same. It only affects the tax year(s) in which the expense is taken. Equating a difference of tax year of a deduction method with an actual credit off the tax bill has no foundation, other than to try to justify EV subsidies to people that don't understand how our tax code works.

it sounds like an accelerated rate of depreciation. They still get to deduct 100% of the cost, just over a shorter period of time. With many multiple wells being drilled each year, over time it must balance out. And they have no idea how long these wells will produce oil/ income.

Ding Ding! No surprise this concise answer comes from someone who has actually filled out a form 4562 for depreciation on his taxes. Here we see no net benefit. Accelerated depreciation can be a cash flow benefit if equipment purchase is done unevenly, but the net effect is still no subsidy. It is not political. This is very different and distinct from an actual tax credit. The credit is never recovered by the IRS, you get to keep it. It is a credit against your total tax bill, you get to keep more dollars in your pocket. We have a different word for that and that word is - subsidy.

Easydriver cannot deduct the cost of a car he drives for personal use. If he buys an EV. the government says, 'thank you, reduce your tax bill by $7,500.' Easydriver writes a check for $7,500 less than he would otherwise that year to the IRS. That's different than depreciation. It's a real discount paid for by the government. (It doesn't even require business use) It's a subsidy.

So back to Exxon. Yes, they get a few different depreciation methods than others get, but they reflect the unique nature of their business. Commercial real estate has different depreciation rules that reflects their business. Neither one gets a subsidy. Neither one matters if you earn 500 billion or 500 thousand. It just sounds better to blame a billion dollar company if you have an agenda.

*You could argue net present value differences for uneven cash flow years, but that is too far in the weeds.
**Do not confuse cash flow with after tax cash , ie money in your pocket.

[easyrider16]

The "net benefit over time"* of all accelerated depreciation is zero. Depreciation is just a timeline (greater than one year) of expensing large purchases. It affects cash flow, ie deduct me now or deduct me later. The total deduction over time is still the same. It only affects the tax year(s) in which the expense is taken.

There is a net benefit over time to accelerated depreciation because there is a time value to money. If I can offset a billion dollars in taxes today instead of waiting 10 or 20 years to do it, that is a billion more in my pocket today, right now, that I can use to make more money over that time frame. That has a lot of value.

Your arguments about these tax provisions being based on the unique nature of the business also miss the mark. There are a bunch of industries that make all kinds of capital outlays that are risky and potentially unproductive. One of them is mining. Miners bear similar types of risks and expenses as oil companies in terms of opening a new mine and it not being productive, but they don't get the same special election for capital deduction. It's specific to oil and gas companies. See 26 CFR § 1.612-4.

But then consider companies that spend a ton on R&D - Facebook just spent $15 billion on developing the metaverse, and that might never see a return on investment. Yet those capital outlays do not get the same special treatment that oil and gas companies receive.

Equating a difference of tax year of a deduction method with an actual credit off the tax bill has no foundation, other than to try to justify EV subsidies to people that don't understand how our tax code works.

I disagree. They are both a benefit provided by the tax code which costs taxpayers money. The one for oil and gas companies costs a lot more. The rest of your argument is semantics about what to call it.

Oh and by the way, none of the above even touches on the other major benefit oil and gas companies get, the percentage over cost depletion. The value of this one also seems to well exceed the cost of EV subsidies.

Excess of percentage over cost depletion allows producers to deduct a fixed percentage of gross revenue as capital expenses each year, without regard to how much they have invested. By contrast, conventional cost depletion allows deduction of actual costs as the resources from a well or mine are depleted.

source:https://www.taxpolicycenter.org/briefin ... ssil-fuels