Oily Loophole

BP is claiming an $11.8 billion tax write-off on costs associated with cleaning up the Deepwater Horizon oil rig and well disaster. The company classifies these as "ordinary and necessary" business expenses under federal law.

Necessary? Absolutely. But if they are "ordinary," that's a startling admission of BP's general incompetence.

The disaster was extraordinary, and investigations have indicated it was hardly random. The National Commission on the BP Deepwater Horizon Oil Spill found numerous examples of negligent actions by BP officials and contractors that led to the rig explosion and well blowout. The company failed to adequately identify risks created by late changes to the well design and procedures, and it did not have adequate controls in place to ensure that key engineering decisions were safe or sound.

The commission concluded: "A blowout in deepwater was not a statistical inevitability."

Nor was that BP's first tumble at the rodeo. The company in recent years has had the worst safety record in the U.S. oil industry. After a 2005 BP refinery explosion in Texas City, Texas, killed 15 people and injured 180, the Occupational Safety and Health Administration (OSHA) said the company's refineries had a "systemic safety problem."

But for BP, these things are just the cost of doing business — which it can then use to reduce its federal tax liability.

Sen.

Bill Nelson, D-Fla., was justifiably outraged by that. At a Senate Finance Committee hearing on the oil industry last week, Nelson said that claiming a tax write-off may be lawful, "but that doesn't make it right." He pointed out that in recent years Boeing and Goldman Sachs had voluntarily declined (under public pressure) to deduct expenses related to their separate cases of corporate wrongdoing.

BP should do the same. And to prevent future abuses of this loophole, Nelson is sponsoring legislation that would prevent legal, cleanup and other costs associated with oil spills from being deducted as ordinary and necessary business expenses under Section 162 of the tax code.

The bill would make an exception for oil spills that "are an act of God or an act of war." That's sensible. The Deepwater Horizon debacle wasn't the result of a hurricane, earthquake or terrorism. It occurred because of human error — avoidable error — that resulted in the worst environmental disaster in U.S. history. That should never be treated as an ordinary or standard business expense, and it should not be rewarded with favorable tax status.

Removing the tax write-off would provide one more incentive to oil companies not to cut corners, knowing they will have to bear the full brunt of the costs of cleaning up their mistakes. The threat of punitive economic punishments should be a more effective deterrent than piling up more and more government regulations. Rules can be gamed — BP's cozy relationship with federal regulators through the years proves that. But it you are going to lose your shirt, you might think twice about trying to just get by.

REPRINTED FROM THE PANAMA CITY NEWS HERALD.

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