True Amount of BP Settlement Will Depend on Hidden Tax Giveaways

Today, BP agreed 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 that amount if the company is allowed to take the settlement as a tax write-off.

"The judge shouldn't approve this settlement if BP could pass 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, every dollar BP writes off means an additional dollar Americans will pay in the form of higher taxes, budget cuts, or more national debt."

According to news accounts, BP has agreed to 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 an additional $1.3 billion. The total net cost to BP of the settlement would then be only $2.5 billion.

At issue is whether, by agreeing to a settlement, lawyers for BP can assert that these costs are not punitive, even though they are clearly for wrongdoing that brought criminal charges.

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 the exact deal those 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," said Baxandall.

In fact, when a company negotiates a tax-deductible settlement for its misdeeds, the public loses out four times over. First, the public suffers the direct impact of corporate wrongdoing. Second, taxpayers are forced to shoulder 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.