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BP agreed today to a $4.5 billion settlement to resolve felony and misdemeanor charges related to the gulf oil spill, but taxpayers may end up indirectly covering up to 35 percent of the amount if the company is allowed to take the amount as a tax write off.
It would be an outrage if BP ends up passing off much of this settlement cost onto taxpayers,” said Phineas Baxandall, the Senior Tax and Budget Policy Analyst at the U.S. Public Interest Research Group (U.S. PIRG). “Especially in the context of pressing budget shortfalls and every dollar BP writes off means an additional dollar Americans will pay for as higher taxes, budget cuts, or more national debt.”
According to news accounts, BP said it would increase its existing $38.1 billion charge against earnings for the spill by $3.85 billion. The company has already written off almost $10 billion of these costs as tax deductions. If the company treats the entire new amount as a normal deductible business cost, then the oil and gas giant could reduce its future tax bills by over $1.3 billion. The total net cost to BP would then be only $2.5 billion.
At issue is whether, by agreeing to a settlement, lawyers for BP can assert that the settlement is not punitive, even though it is clearly for wrongdoing that brought criminal charges. Unless federal agencies clearly spell out that settlements should not be deducted, companies that pay these fines and penalties very often deduct them like business expenses, even when rules suggest they should not, according to a study by the Government Accountability Office. Agencies often do not see it as their job to deal with tax issues and the IRS usually throws up its hands saying they can’t interpret the intent of agencies.
BP is expected to pay billions more in a future settlement related to violations of the Clean Water Act and other environmental laws. Whether or not those expenses would be tax deductible will depend on what federal agencies negotiate.
“Paying settlements for causing disasters like the Gulf spill is supposed to teach a lesson to corporate wrongdoers. To the extent that taxpayers pick up the tab, it becomes political theater. BP and the Department of Justice both get to tout a big number that isn’t real. This shouldn’t be a tax write off,” said Baxandall.
In fact, when a company negotiates a tax-deductible settlement for its misdeeds, the public loses four times over. First, the public suffers the direct impact of corporate wrongdoing. Second, taxpayers are forced to shoulder part of the amount of the penalty because the public must cover the forgone revenue by raising tax rates, cutting public programs, or adding to the national debt. Third, future deterrence of corporate wrongdoing is weakened. And fourth, the absence of a trial eliminates opportunities for a public airing of evidence about corporate misdeeds and the lax regulations that can lead to them.
A 2012 report by U.S. PIRG on the tax deductibility of costs from corporate wrongdoing can be found here.
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U.S. PIRG, the federation of state Public Interest Research Groups, is a non-profit, non-partisan public interest advocacy organization.
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