Take BP
BP managed to write off the cost of its $32 billion cleanup and collect a $10 billion federal tax windfall for the spill.
Yes, you read that correctly. BP took a $10 billion tax break for the Deepwater Horizon oil spill.
Deepwater Horizon wasn’t the first oil spill to be written off as a tax deduction, and it won’t be the last unless the rules change. When the Exxon Valdez tanker ran aground in 1989 and spilled 11 million gallons of oil into Alaska’s Prince William Sound, Exxon was fined $5 billion.
Less well-publicized was that Exxon argued the decision in court for the next 20 years until 2005 when the Supreme Court decreased the fine to $500 million. Exxon then took a $200 tax deduction. When all was said and done, Exxon ended up paying about $300 million for the spill.
If these oil companies had simply been fined for their spills they would not have been able to take these massive tax windfalls. Similarly, if normal citizens pay parking tickets or late fees at the library, we can’t deduct them from our taxes, even if we negotiate over the fine.
But when corporations negotiate violations of the law, they can take advantage of a special loophole. While federal law forbids companies from deducting public fines and penalties from their taxes, if their lawyers negotiate payments through a legal settlement, then they can typically write the payments off as a tax deduction unless the agency specifically forbids it.
This is a broader problem that also includes companies deducting settlements for misdeeds such as foreclosure and Medicare scams, dangerous pharmaceuticals, and consumer swindles.
When this happens, the public is triply harmed. First is the direct harm of the oil spill or other corporate misdeed. Second, government revenues are reduced by up to 35 percent of the settlement amount at the federal level, and additional amounts at the state level. For each dollar a company like BP writes off, the public must pick up the tab through cuts to public programs, additional taxes for ordinary citizens, or more government debt.
Thirdly, future deterrence of corporate wrongdoing is weakened, as perpetrators understand that the true sticker price for violating the public trust will be far less in the headlines.
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