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Originally published July 3, 2010 at 8:35 PM | Page modified July 4, 2010 at 2:51 PM

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As oil industry fights a spill-cleanup tax, it reaps large subsidies

When the Deepwater Horizon disaster set off the worst oil spill in U.S. history, it was flying the flag of the ...

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Related developments

"A Whale" test: The Taiwanese vessel dubbed "A Whale," which its owners describe as the largest oil skimmer in the world, began showing its capabilities on Saturday near the Deepwater Horizon spill site. The vessel will cruise a 25-square-mile test site through Sunday, according to TMT Shipping, the firm that created the vessel by retrofitting an oil tanker. The U.S. Coast Guard, along with BP, are waiting to see if the vessel can live up to its makers' promise of being able to process up to 21 million gallons of oil-fouled water a day.

Skimmers return: Oil skimmers were back at work along the Gulf Coast Saturday, after being forced to stand down for several days because of nasty weather whipped up by distant Hurricane Alex.

EPA visit: Environmental Protection Agency (EPA) Administrator Lisa Jackson visited Pensacola Beach, Fla., on Saturday, her first trip to Florida since the Deepwater Horizon explosion. Jackson watched workers flick penny-size gobs of tar into nets, sifting them to filter out the sand and smaller pieces of tar. Officials overseeing the cleanup showed her how the oil had been buried by successive waves of sand, and how more layers with tar were under the top layer of sand. Pressed on whether she would wade into the water Saturday based on what she had seen, Jackson said, "I would not go into the water today."

Court request: A court filing Friday by several environmental groups asked Judge Martin Feldman of U.S. District Court in New Orleans to throw out his June 22 order overturning a six-month ban on deep-water drilling in the Gulf because of his investments in several oil and gas companies.

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When the Deepwater Horizon disaster set off the worst oil spill in U.S. history, the drilling platform was flying the flag of the Marshall Islands. Registering there allowed the rig's owner to significantly reduce its U.S. taxes.

The platform's owner, Transocean, moved its corporate headquarters from Houston to the Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also helped it avoid taxes.

At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon, a deduction of more than $225,000 a day since the lease began.

With federal officials considering a new tax on petroleum production to pay for the Gulf spill's cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, and an increased dependence on foreign oil.

An examination of the U.S. tax code indicates oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments such as oil-field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

For many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits. These companies' returns on those investments are often higher after taxes than before.

"The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant," said Sen. Robert Menendez, D-N.J., who has worked on a bill that would cut $20 billion in oil-industry tax breaks during the next decade. "There is no reason for these corporations to shortchange the American taxpayer."

Oil-industry officials say the tax breaks, which average about $4 billion a year according to various government reports, are a bargain for taxpayers. By helping producers weather market fluctuations and invest in technology, tax incentives are supporting an industry that the officials say provides 9.2 million jobs.

The American Petroleum Institute, an industry advocacy group, says that even with subsidies, oil producers paid or incurred $280 billion in U.S. income taxes from 2006 to 2008, and pay a higher percentage of their earnings in taxes than most other U.S. corporations.

As oil continues to spread across the Gulf of Mexico, however, the industry is being forced to defend tax breaks that some say are being abused or outdated.

The Senate Finance Committee on Wednesday said it was investigating whether Transocean had exploited tax laws by moving overseas to avoid paying taxes in the United States. Efforts to curtail the tax breaks are likely to face fierce opposition in Congress; the oil and natural-gas industry has spent $340 million on lobbyists since 2008, according to the nonpartisan Center for Responsive Politics, which monitors political spending.

Jack Gerard, president of the American Petroleum Institute, warns that any cut in subsidies will cost jobs.

"These companies evaluate costs, risks and opportunities across the globe," he said. "So if the U.S. makes changes in the tax code that discourage drilling in Gulf waters, they will go elsewhere and take their jobs with them."

Some government watchdog groups say that only the industry's political muscle is preserving the tax breaks. An economist for the Treasury Department said in 2009 that a study had found that oil prices and potential profits were so high that eliminating the subsidies would decrease U.S. output by less than half of 1 percent.

In the past 10 years, oil companies have been aggressive in using foreign tax havens. Many rigs, such as Deepwater Horizon, are registered in Panama or on the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations.

Transocean — which has about 18,000 employees worldwide, including 1,300 in Houston and about a dozen in Zug, Switzerland — has saved $1.8 billion in taxes since moving overseas in 1999, a recent study for the trade publication Tax Analysts found.

Transocean said that it had paid more than $300 million in taxes for 2009, and that its move reflected its global scope, with only 15 of its 139 rigs in the United States. "Transocean is truly a global company," it said in a statement.

It is far from certain that Congress will eliminate the tax breaks. As recently as 2005, when windfall profits for energy companies prompted President George W. Bush — a former Texas oilman — to publicly call for an end to incentives, the energy bill he and Congress enacted still included $2.6 billion in oil subsidies. In 2007, after Democrats took control of Congress, a move to end the tax breaks failed.

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