Opinion: Merrill Matthews: About Those Tax Breaks for Big Oil . . .

President Obama has been telling America for months that special tax breaks for the oil and gas industry must come to an end. The presidential demand always prompts puzzled gazes among tax and energy-industry experts, who ask: What special tax breaks?

Thanks in part to a bill sponsored by Rep. Chris Van Hollen, a Democrat from Maryland and ranking member on the House Budget Committee, it's all much clearer now. The congressman has inadvertently called attention to the fact that those special tax breaks just for the oil and gas industry don't exist. Mr. Van Hollen proposes to create some very special punishments instead. Regardless of the bill's fortunes on Capitol Hill, it has already performed a public service by illuminating the fallacy behind assaults on the industry.

Mr. Van Hollen's ''Stop the Sequester Job Loss Now Act" would raise taxes on individuals�what he calls the "Fair Share on High-Income Taxpayers"�and effectively hike taxes on the oil and gas industry by changing the way their taxes are calculated. The problem with the bill is that the so-called tax breaks the industry would lose are not specific to oil and gas at all. They are widely available to lots of industries.

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Title III of the act goes after oil and gas with: a limitation on the section 199 deduction; a prohibition on using last-in, first-out accounting for major integrated oil companies; and a modification of the foreign tax-credit rules.

Section 199 is part of the domestic production activities deduction that was included in the American Job Creation Act of 2004, which passed with strong bipartisan support, especially in the Senate. It currently provides a 9% tax deduction from net income for businesses engaged in "qualified production activities" in the U.S. Those activities include manufacturing a product, selling, leasing or licensing it, and engineering and software activities related to that production. The deduction was intended to encourage domestic manufacturing, and in the hope that the tax break could provide a slight competitive advantage against foreign competition.

The oil and gas industry, especially in its extracting and refining, is heavily involved in U.S. manufacturing. Congress already penalizes the industry by only giving it a 6% deduction, rather than the 9% that other industries receive.

But whatever the percentage allowed, this isn't a special deduction for oil and gas. Many other manufacturing industries�including farm equipment, appliances and pharmaceuticals�take the deduction. Mr. Van Hollen's bill refers to the disqualification of two industries from these benefits as a "Special Rule for Certain Oil and Gas Companies." In terms of fairness, it's like telling oil company workers that they can't take the home-mortgage deduction anymore because they work for politically targeted companies.

Mr. Van Hollen also draws a bead on the last-in, first-out accounting method known as Lifo. Those who had accounting classes will recall that there are several widely accepted ways to value a company's inventory. Lifo is one of them. It assumes that the last inventory in is the first used, sold or distributed�an accounting method often used by commodity-type industries. Mr. Van Hollen proposes to reduce those inventory options available to the oil and gas industry, even though they are, and will remain, widely available to most U.S. companies.

Critics of the industry claim that there are other ways of appraising oil and gas inventory that would result in a higher value, and thus companies would have to pay more taxes. But that's like offering individuals the choice of taking the standard deduction or itemizing on their returns, and then demonizing a subset of people who choose the approach that minimizes their income tax obligation.

The third provision of Mr. Van Hollen's bill seeks to change the foreign tax-credit rules�but only for integrated oil and gas companies. American companies operating in foreign countries have to pay the taxes imposed by those governments. The U.S. government generally gives companies operating in foreign countries a tax credit to offset the foreign taxes paid, so the companies are not taxed twice on the same foreign income. That generally includes royalties paid to foreign countries.

Mr. Van Hollen's way of repealing this tax break for one particular industry is to assert that the royalties cannot be called a tax when they apply to that industry: "[A]ny amount paid or accrued by a dual capacity taxpayer which is a major integrated oil company to a foreign country or possession of the U.S. for any period shall not be considered a tax." If an oil company can't call a foreign royalty a tax, then it can't get the foreign tax credit.

Ironically, USA Today just published the top-10 list of companies that paid the highest U.S. income taxes as of 2012, and oil industry companies took three of the slots. Number one was Exxon Mobil at $31 billion, followed by Chevron at $20 billion, and sixth was ConocoPhillips at $8 billion. That is about $60 billion in taxes among them, more than the other seven companies on the list�including Apple and Microsoft �combined. Don't look for a presidential attack on Apple or Microsoft anytime soon.

Mr. Matthews is a resident scholar at the Institute for Policy Innovation in Dallas.