Why Disallowing a Deduction for OPA Costs Violates

American Tax Policy

The United States has historically taxed corporations on their net profits, which by definition
allows deductions for expenses incurred by corporate taxpayers. Proposals to disallow
deductions for costs associated with oil spill cleanup and recovery not only violate traditional
concepts of fair play, but also could jeopardize some of the 9.2 million jobs supported by the oil
and natural gas industry, and compromise America’s energy security. Congress should not
support the cleanup deduction disallowance for oil operations for several reasons:

Contrary to media reports, oil companies are not utilizing an arcane loophole in
deducting costs associated with oil spill cleanup, but are instead relying on the US Tax
Code’s long-standing provision allowing a deduction for ordinary business expenses of
which all business entities can and do avail themselves.
Proposed legislation would violate well settled principles of US income tax law that
impose tax only on taxable income, which is generally gross income less operating
expenses.
Deductions are most often disallowed in cases where public policy would otherwise be
violated, such as deductions for the expenses of a criminal enterprise or bribes to a
government official - not in instances of corporations taking responsibility for
environmental cleanup.
The amounts that oil companies may deduct typically represent actual, out-of-pocket
cash outlays and include amounts stemming from the oil industry’s willingness to bear
the full and immediate cost of incidents for which they are responsible.
A tax deduction is not a dollar for dollar reduction in tax liability; rather a deduction
yields a tax reduction equal only to a percentage of the deduction equal to the tax rate.
For example, if Corporation X (whose tax rate is 35%) had a deduction of $100 of
business expenses, they would only receive a reduction in tax liability of $35.
The US Tax Code is a powerful tool that allows the government to raise revenue; as
such, it should not be manipulated and molded to treat a certain group of taxpayers
more harshly than others.
Domestic oil and gas production is vital to US energy security. Disallowing deductions for
costs to clean up an incident discourages future development of domestic resources.
This will certainly have the effect of rendering the US even more reliant on foreign oil
production as the cost of US domestic production is driven up by higher tax costs.

For more information, visit API.org

September 2010