Congress stops oil companies from drilling into Treasury

Budget deal shows that even the best lobbyists have their limits

December 18, 2013 7:00AM ET
Oil drilling site in the Missouri Breaks, 2012.
Universal Images Group/Getty Images

The two-year bipartisan federal budget deal, announced Dec. 10 by lead negotiators Sen. Patty Murray (D-Wash.) and Rep. Paul Ryan (R-Wis.), will hit the jobless, the poor and especially poor children hard, but with one exception it does nothing to close corporate tax loopholes or reduce corporate welfare.

Pro-austerity Republicans, led by Ryan, are the big winners in the budget deal. They gave up almost nothing and will escape the risk of turning even more supporters into angry opponents over another government shutdown, which would damage many businesses as well as individuals.

Democrats, on the other hand, had to agree to end long-term unemployment benefits three days after Christmas, to cut $400 million from the Head Start program that will turn away 57,000 poor children from early education and other services for their families, and to reduce lifesaving medical research by $1.5 billion annually.

Both Social Security and Medicare are untouched for the moment. But when that fight comes, starting next year, it won't be just over the drive by austerity Republicans to cut benefits. Instead progressive Democrats will push for an expansion of Social Security, a policy I've long advocated.

The most interesting detail in the budget deal, however, has received very little attention. It is an important sign, a sort of canary in the mineshaft, about the limits on corporate chiseling of the public treasury.

Some loopholes are too good

Big companies have recognized for the past two or three decades that often it is easier to get laws passed and rules adopted that convert public dollars into private profits than to earn those profits in the competitive marketplace.

That is a major reason why today more than 13,000 registered lobbyists, as well as another 22,000 or so people who lobby but are not required to register, work in Washington trying to secure legislation for special interests, compared to about 1,000 lobbyists 50 years ago.

Lobbying jobs start in six figures and some lobbyists haul in millions of dollars annually. Not surprisingly, these rich rewards have attracted ambitious young people. These days lobbying is even taught in some public policy graduate schools.

The best lobbyists, however, with deep pockets to support friends in office or to threaten a campaign opponent, cannot overcome indefensible policies, especially if lawmakers grasp their indefensibility and the potential to be forced to defend them publicly. And that one exception to the budget deal's failure to address corporate loopholes and corporate welfare illustrates this.

Both parties say they oppose tax loopholes and corporate welfare. But those are mere buzzwords. Besides, one senator's loophole is another senator's tax incentive. But in this deal Congress finally decided to end one of the most heinous instances.

This one action Congress has taken to reduce corporate welfare will rein in a very lucrative game played by one of the biggest and most influential industries, with an army of lobbyists and plenty of campaign contributions to spread around: oil.

Oil companies had an uncanny knack for overestimating their royalty fees at taxpayers’ expense — to the tune of $200 million annually in interest payments.

The oil royalty game

Oil companies haven't just been drilling for oil on federal lands, they have also been drilling into the Treasury. In a little known program run by the Office of Natural Resources Revenue, they have been making money off the taxpayers by paying more in royalties on oil taken from public lands than they actually owe.

It may seem odd that anyone or any business would pay more than it owes in royalties, taxes or anything else. But overpaying can actually be quite profitable.

In this era of low interest rates, companies flush with cash are always looking for ways to make more than the near-zero market rate of interest. Currently, large deposits left for 90 days earn just 24 basis points, Wall Street speak for an eyelash short of a quarter of a percent on an annual basis.

But Uncle Sam can pay better than market rates, especially if he's convinced by the right lobbyist. And on excess royalty payments the government has been paying oil companies 12.5 times the market rate, or 3 percent. Yes, that's right: 12.5 times the market rate.

Anything that pays that much above market will always be attractive to those sitting on piles of cash looking for the right investment. But this boondoggle was such an indefensible drain on tax dollars that members of both parties in Washington finally agreed to put a stop to it in a sensible way.

President Barack Obama, in his proposed 2014 budget, called for ending interest payments on oil-royalty overpayments. He was rather late to that idea. House Democrats on the natural resources committee proposed it in 2007 and the full House then passed a bill to end all interest payments on overpayments of oil royalties. Industry lobbyists got the bill killed in the Senate.

The oil industry argues, reasonably, that oil royalties are not as simple and straightforward a transaction as adding up items in the grocery store checkout line. Just as the federal government routinely revises monthly data on jobs, inflation and other economic indicators, the amount of oil actually pumped from federal lands and offshore is estimated and gets revised later. But oil companies had an uncanny knack for overestimating their royalty fees every year at taxpayers' expense — to the tune of $200 million annually in interest payments.

The budget deal fix seems like a pretty good model of how to address problems like this while being fair both to the oil industry and taxpayers.

Back to Head Start

Once the budget deal becomes law Uncle Sam will still pay high interest rates, currently 3 percent — though in the last decade the rate has been as high as 8 percent. But the big difference is that the interest will only be paid on a tenth of future overpayments. In fact, that 3 percent interest rate will drop to 30 basis points, roughly what the market pays.

That will end the incentive to make excessive overpayments that suck dollars from the Treasury the way the companies suck oil from public lands.

Would that such balanced thinking were applied to the awful plight of the long-term unemployed at a time when there are three applicants for every available job and the population continues to grow faster than the number of jobs. Would that the poor children who will not get a better shot at adult success because Head Start slots are being cut were thought about with the same degree of care.

The $200 million annual cost of the royalty overpayments, based on White House budget estimates, is equal to the cost of Head Start for half of the children cut from the program.

Under the new reduced interest rate policy, Congressional Budget Office figures indicate, taxpayers will still shell out about $75 million annually, money that if invested in poor children would restore almost 11,000 poor children to Head Start.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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