The Senate Finance Committee held a hearing Thursday on tax breaks for oil companies, bringing together top executives from the largest oil companies to defend their tax credits.

A group of senators introduced legislation earlier this week to repeal tax breaks such as the Section 199 domestic manufacturing production credit and the ability to claim foreign tax credits for the Big Five oil producers (see Senators Propose Bill to Close Oil Tax Loopholes). President Obama has also pushed for repealing the tax breaks as a way to help close the budget deficit.

“With high deficits and debt, we have to make tough choices, but it isn’t a tough decision to end taxpayer subsidies for oil and gas companies making $35 billion in the first quarter alone.” said Senate Finance Committee Chairman Max Baucus, D-Mont. “These tax breaks represent less than 2 percent of what these companies are on track to make this year, so it’s clear they aren't needed to ensure profitability and they haven’t kept gas prices down.”

Exxon Mobil chairman and CEO Rex Tillerson argued that repealing the tax breaks would be counterproductive and discriminatory and would undermine U.S. competitiveness in the oil market. “All of us here today recognize the strain that high gasoline prices impose on many Americans, particularly during difficult economic times,” said Tillerson. “And we owe it to our customers and your constituents to address the topic of energy prices and taxes in an open, honest and factual way. Unfortunately, the tax changes under consideration that target the five U.S. energy companies represented here today fail to honor these goals.”

At the hearing, Baucus noted that gas prices, which are expected to remain at close to $4 a gallon for the rest of the summer, are up over $1 a gallon compared to last year. He contrasted the increased costs families will pay this year for gasoline with the increased profits oil and gas companies will collect. 

Baucus countered claims that ending taxpayer subsidies could increase gas prices.  He looked at one of the subsidies, the Domestic Manufacturing Deduction, also called Section 199, which was created in 2004 when gas prices averaged about $1.85 per gallon. Baucus questioned whether these tax incentives have been an effective investment to keep prices down, given that prices have risen to nearly $4 a gallon since the deduction was created.

He also noted a 2007 Joint Economic Committee analysis, which found that repealing the oil and gas tax breaks would not raise energy prices for consumers. Baucus discussed how oil prices are set on a world market. He claimed that because the U.S. share of production is only 10 percent, it is nearly impossible to pass on to consumers the cost of cutting oil and gas subsidies.

However, Sen. Orrin Hatch, R-Utah, the ranking Republican member on the committee, questioned the wisdom of repealing the tax breaks.

“Raising taxes to address high energy prices is about as relevant as a person walking into a doctor’s office complaining of chest pain, and having the doctor respond by offering to reupholster the patient’s couch.,” he said. “Families and businesses are being hit by high gas prices. This demands an energy policy. But all this hearing is about is providing a justification for tax increases.  I wish I could say I was surprised.  No matter what the question is, it seems that for the President and some of my colleagues, the answer is always raise taxes.”

Chevron chairman and CEO John Watson insisted that the oil and gas industry already pays its fair share of taxes and noted that the oil and gas provisions in the Tax Code parallel the tax treatment of other industries such as pharmaceuticals and technology, allowing them to deduct their research and development expenses. He noted that the tax credits are designed to prevent double taxation of income.

“Tax increases on the oil and gas industry—which will result if you change long-standing provisions in the U.S. Tax Code—will hinder development of energy supplies needed to moderate rising energy prices,” he said. “It will also mean fewer dollars to state and federal treasuries…and fewer jobs—all at a time when our economic recovery remains fragile and America needs all three.” Watson insisted there should be equitable treatment for all forms of energy and all producers of energy, large and small.

Sen. Jay Rockefeller, D-W.Va., compared the situation faced by the oil executives with the economic plight of his constituents back in West Virginia. "I think you're out of touch, deeply, profoundly out of touch, and deeply and profoundly committed to sharing nothing," he said.

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