A mature industry can give back: That was the case with ethanol, and it’s especially the case with oil.

(opinion piece by Sen. Amy Klobuchar, published in the Star Tribune newspaper, July 18, 2011)

In a report last December, the bipartisan National Commission on Fiscal Responsibility and Reform called on our elected leaders to make the tough choices necessary to responsibly reduce the deficit. Among the specific recommendations was comprehensive tax reform that would close loopholes and end special tax breaks, with most if not all of the savings dedicated to deficit reduction.

Corn farmers and the ethanol industry have just agreed to sacrifice their fair share. Now it’s the oil industry’s turn.

Earlier this month, I joined my Senate colleagues John Thune, R-S.D., and Dianne Feinstein, D-Calif., in brokering a bipartisan agreement to end the major tax credit for ethanol while allowing for a transition to a more sustainable model of incentives for domestic renewable fuel production. Under this deal, the Volumetric Ethanol Excise Tax Credit (or VEETC) will expire at the end of this month instead of the end of 2011, as scheduled.

Eliminating this tax credit early will mean that $1.3 billion will immediately be dedicated to debt reduction. The remaining one-third of savings will go to targeted incentives for advanced biofuels and infrastructure, which will bring greater competition to the fuel market.

Minnesota has been one of the biggest beneficiaries of this tax credit. We now rank fourth nationally in both corn and ethanol production, with 21 ethanol plants that are responsible for more than 8,400 jobs and $3.1 billion in annual economic output. Nationally, ethanol production has quadrupled over the past seven years. It is now a competitive, established industry in the energy market, providing 10 percent of America’s fuel supply. We now get more gasoline from ethanol than we import from Saudi Arabia.

Incentives for ethanol have helped us reduce our dependence on foreign oil, while strengthening our rural economies. But in these tough economic times we simply can’t afford them.

Tell that to the oil industry.

The big oil companies have long enjoyed what economists call “tax expenditures.” A better name might be “stealth spending,” because it is government spending hidden in the intricacies of the federal tax code.

Tax expenditures make sense when we want to encourage a specific economic activity in the public interest, such as making home ownership more affordable or stimulating private sector investment.

Oil companies have enjoyed federal tax subsidies on a much greater scale and for a much longer time than the ethanol industry.

It’s a very impressive (and very expensive) laundry list: Domestic manufacturing tax deduction for oil production — $18.2 billion over 10 years. Expensing of intangible drilling costs — $12.5 billion over 10 years. Percentage depletion allowance — $11.2 billion over 10 years. Dual capacity rule for foreign tax credits — $10.8 billion over 10 years.

Two of these (intangible drilling deduction and oil depletion allowance) have been available to the oil industry for nearly a century. Maybe the oil companies needed them back then. They don’t need them now.

The five largest oil companies in the United States are Exxon Mobil, Shell, BP, Chevron and ConocoPhillips. In the past decade, they have racked up almost $1 trillion in profits.

In just the first quarter of 2011, these five companies had combined profits of $32 billion, up 30 percent from a year earlier.

Last year, for the eighth consecutive year, Exxon Mobil was the most profitable corporation among the Fortune 500. Yet, according to the Center for American Progress, Exxon Mobil’s effective federal income tax rate is just half what it is for most other corporations, and is even lower than the effective personal income tax rate.

This is not to pass judgment on whether the oil companies deserve their profits, even such large profits. Nor is it a statement on drilling — I support it. Instead it is a question about whether such a hugely profitable industry should continue to enjoy lucrative tax advantages at a time when our nation can least afford it.

With oil prices much higher than actual costs, the oil industry doesn’t need extra money from the government as an incentive to explore and drill more oil.

What’s fair is fair. A relatively small industry like ethanol is willing to put two-thirds of its tax breaks on the table for deficit reduction. The much larger and much more profitable oil industry can certainly afford to do the same, if not more.

Amy Klobuchar, a Democrat, represents Minnesota in the U.S. Senate.

Our Take:
Fair is fair.

We agree this is not a judgment about whether the oil companies deserve their profits.

And we agree with the Senator that drilling must continue–farmers, like the rest of the country, will depend on petroleum for some time to come.

But without all the government handouts, in particular the drilling depletion allowance, which essentially allows oil companies to collect money for the value they have already sucked out of the ground, maybe the worst of Big Oil’s ecological sins would not be incentivized–namely thermal enhanced oil recovery, which uses groundwater and lots of steam energy to extract the last drops from tired, tapped out wells.

Leave that oil in the ground (and that groundwater for better uses) ethanol gains ground not only as the environmentally sensible and politically advisable alternative, but more economically competitive as well.

Now that ethanol is going without, it’s time to level the playing field.

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