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Republicans Want to Re-Open a Tax Loophole that Benefits Fossil Fuel Companies

The GOP plans to void a rule that stops oil, gas, and coal companies from artificially depressing their royalty rates.

by Sarah Emerson
Feb 15 2017, 9:50pm

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For decades, American coal companies exploited a loophole in the federal coal program that allowed them to dodge royalties and shortchange taxpayers. These fossil fuel giants avoided paying up to $850 million in government returns between between 2008 and 2012, through a network of subsidiaries and cost manipulation, at the expense of the average American.

Last year, the Office of Natural Resources Revenue (ONRR), a small agency within the Department of the Interior (DOI), successfully closed the loophole. And now, Republicans are fighting to open it again.

The sweeping rule, proposed by the DOI under Secretary Sally Jewell and called the "Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform," required oil, natural gas, and coal companies to pay royalties to taxpayers on the actual market value of their commodities. The rule would also make the valuation process more transparent, and was part of a larger effort to modernize America's aging federal coal program.

GOP members say the reform "places undue accounting burdens on US energy producers." The joint resolution (H.J. Res. 71) to void the ONRR rule was introduced by Rep. Scott Tipton (R-CO) this week. He and 11 co-sponsors, all from leading fossil fuel states, are using the Congressional Review Act to roll back the "midnight rule," or regulation creation during the Obama administration's final months.

Wikipedia/Greg Goebel

Surface coal mine, Campbell County, Wyoming.

The incentive behind the resolution isn't difficult to spot. Rep. Tipton, its lead sponsor, has received $448,713 in campaign contributions from the oil and gas industry throughout his career, according to the Center for Responsive Politics.

If passed by both chambers of Congress, the bill will fall into President Trump's lap to approve or veto. Trump campaigned on a dubious promise to revive America's dying coal industry, so it's likely he'll support the resolution. Still, even if the rule is overturned, market forces outside of royalties, such as the booming natural gas industry, are expected to keep coal down, no matter how many exemptions Republicans make for it.

"The Russians may be pulling the strings in the White House, but it's still Big Oil pulling Republican strings in the US House. They have spent the first weeks of this Congress doing one favor after another for the fossil fuel industry, and now it's Scott Tipton's turn to lead the effort to provide Big Oil yet another taxpayer-funded windfall," Rep. Raul Grijalva (D-AZ), who also serves as ranking member of the House Natural Resources Committee Democrats, told me.

The way fossil fuel companies were avoiding royalties was deceptively simple. A coal producer, for example, would sell its product to a self-owned subsidiary at a decreased price. In turn, that subsidiary would sell the company's coal on the open market for a profit. But the company, instead of paying royalties (12.3 percent on average, according to DOI) adjusted for the coal's market rate, would pay them based on the artificially depressed rate (approximately 4.9 percent).

These are called "non-arm's-length" transactions, which are sales between affiliated companies. And while legal, they allowed fossil fuel producers to make windfalls at the expense of federal (aka taxpayer owned) and Native American leaseholders.

"The coal program has been plagued by manipulation for more than 30 years. This is foul play and self-dealing underhanded by the industry," Theodore Spencer, a senior policy advocate for the Natural Resources Defense Council, told me.

A Reuters investigation in 2012 blew the lid open on several of these schemes in Wyoming and Montana's Powder River Basin. The practice, they found, cost taxpayers around $40 million in annual revenue. An audit these transactions was opened in 2013 by Senators Ron Wyden (D-OR) and Lisa Murkowski (R-AK), which led to the creation of ONRR's rule.

Royalties are just one of the ways taxpayers are supposed to be compensated for coal production on public lands. Non-competitive bidding for mining leases has similarly lost an estimated $28.9 billion in revenue over 30 years, according to a report from the Institute for Energy Economics and Financial Analysis.

One of the resolution's co-sponsors, Rep. Jason Chaffetz (R-UT) has introduced several bills that would turn public lands over to private interests.

"Most Democrats will oppose Tipton's resolution, but we know the Republicans have the votes and President Trump will sign the bill," Rep. Grijalva added.

"Once again these House Republican will succeed in making some of the wealthiest companies on earth a little richer, while making average Americans a little worse off."