Obama's Trump Card on Oil Subsidies

President Barack Obama's call to eliminate tax breaks for profit-rich oil companies was a Democratic crowd pleaser during last month's State of the Union address. He had already proposed curtailing the $4 billion-a-year subsidy twice in the last two years, only to be turned back by industry lobbying and lawmakers in both parties. So his decision to mention it again raises the question: Can Obama make it happen this time?

The obstacles are formidable. With Republicans setting the House agenda, there's little chance Obama's initiative will advance in that chamber. His environmental allies may not be much help in pressing the issue, either. They have their hands full trying to beat back a GOP bid to gut the Environmental Protection Agency's curbs on carbon emissions and other anti-pollution programs. In the Senate, where Democrats are seven votes short of the 60 needed to pass most measures, Republicans quickly branded a similar proposal the "minivan tax."

Even some Democrats are balking. Scarcely a week after Obama delivered his applause line, Senator Jeff Bingaman (D-N.M.), the chairman of the Energy Committee, said ending the tax breaks "didn't get any traction" the last two years, "so I would be surprised if it got a great deal of traction" this time.

Bingaman and six other Senate Democrats joined Republicans on Feb. 2 in rejecting a proposal to remove $22 billion in oil-and-gas tax breaks to pay for ending an unpopular tax-reporting mandate, which requires businesses to report transactions above $600 to the IRS. Senator Mary Landrieu (D-La.), another of the seven, says Obama's "counterproductive" targeting of the industry is puzzling, given what she claims are 9.2 million U.S. jobs it provides. "To continue to single out the industry, I just don't think is right, and it's really not smart politics either," she says.

The companies' pitch to lawmakers is that no matter what they think of the industry, at least it pays taxes. Oil and gas companies pay higher effective tax rates than most U.S. multinationals, according to a Bloomberg analysis of 2005-2009 company data. The oil lobby also claims the loss of subsidies will hamper job creation, an Obama priority. With oil prices rising and the Mideast in turmoil, the argument against reducing domestic production by cutting exploration subsidies has also gained heft. "Singling out the oil and natural gas industry through tax increases is bad public policy," says Eric Wohlschlegel, an American Petroleum Institute spokesman.

The President has one powerful card he can play: GOP leaders say there's no limit to the amount of spending they're willing to cut to rein in the deficit. Tea Party Republicans, moreover, have fewer industry ties than party regulars, and many view subsidies as corporate welfare. Obama will test both factions, especially as he is keen to find reductions without touching his spending priorities, including education, research, and infrastructure. Oil companies that, in the President's words, are "doing just fine on their own" make an attractive target. Senate Majority Leader Harry Reid began the bluff-calling on Feb. 8, asking House Speaker John Boehner to close $20 billion in "loopholes for big oil and gas companies" over the next 10 years to start the belt-tightening. If they won't go along, Obama and his Democratic allies will be able to say Republicans aren't as committed to tackling the deficit as they claim to be.

The bottom line: Obama's call for ending oil and gas subsidies gives him a counterpunch to Republican efforts to slash spending for his priorities.

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