Will BP Arrest Change Taxpayer Sentiment About BP’s Billion Dollar Losses?

There are some moments that you remember with perfect clarity. For me, it was the day that my daughter asked me why the birds couldn’t breathe. That day was in June 2010, a month and a half after the April 20 blowout on an oil rig in the Gulf of Mexico. My oldest daughter, now age 9, saw birds covered in oil on the front of the Philadelphia Inquirer and she cried. As a parent, it took me a bit to figure out what to say to her.

I think I said all of the right things. I hope so, at least. I tried to explain what happened without making anyone out to be a villain (since we didn’t have all of the facts) and at the same time, instill a little hopefulness that things would get better. It was a fine line between being honest and not being alarmist.

But it turns out that BP might not have said all the right things. This week, criminal charges were filed against former BP engineer Kurt Mix, for allegedly intentionally destroying evidence. The charges are the first to be filed in the wake of the accident that killed 11 people and has been called the largest environmental disaster in our country’s history.

The crux of the case against Mix is that he destroyed as many as 100 text messages that proved that the amount of oil spilling into the Gulf was actually much more (in some cases, as much as three times more) than the figures that BP was making public. BP has indicated that it will cooperate with the Department of Justice but hasn’t said much more. The implication is, of course, that Mix was a rogue employee who did the wrong thing.

But what if there’s more than just Mix in the, er, mix? Is it believable that, in a company that employees more than 80,000 people, there was just one employee that did the wrong thing? Or is it possible that the underlying accusations in this whole thing – that BP engaged in activities to mislead the public – are bigger than one employee?

And if BP did engage in a cover up, where does their liability begin and end? And does it merit a $13 billion tax break?

Shortly after the historic spill, BP took losses related to the tragedy for tax purposes, reducing its tax bill by $13 billion. The result of those losses? The company paid no federal income taxes in 2010. It was a bitter pill to swallow for many Gulf Coast taxpayers who found out that their compensatory payments from BP would be taxable.

And while some clamored for an investigation into the losses, BP spokesman Daren Beaudo got it right, that under the existing Tax Code, there was a proper adjustment:

Taxes are paid on profits and the Gulf of Mexico spill response costs have reduced BP’s US profits — so it follows that our tax obligations will be lower as well.

About the same time as BP was making these speeches, Goldman Sachs announced that it would not deduct the $535 million it agreed to pay as a part of a settlement with the Securities and Exchange Commission. At the time, the distinctions seemed quite clear: Goldman was paying for its sins, as it were, and most taxpayers felt that the company shouldn’t profit from its own mistakes while BP was simply the victim of a confluence of events.

But what if it turns out that the costs associated with the clean up were made worse by BP’s own policies? Is that still deductible? Probably. Tasteful? Not so much.

Expect taxpayer ire to grow if more information about a potential cover-up come to light in the next few days. The timing couldn’t be worse for the oil giant: BP will release its first quarter earnings in less than a week, May 1. It will likely show strong profits on par with Exxon Mobil and Total Oil, S.A.. After claiming the loss in 2010, the company reported a healthier profit in 2011 than in any of the past four years (book downloads as a pdf); that isn’t likely to change as the price of oil continues to climb.

If things get ugly (and you have to think they will, as I wouldn’t be surprised to see more arrests), BP will find itself once again in the spotlight. Many communities are still suffering from the fallout, with lost tourist dollars and clean-up costs still taking a toll. For some, this arrest comes at just the right time, finally proving what many taxpayers thought already. Orange Beach, Alabama, Mayor Tony Kennon may have summed up the sentiment best:

This validates our claim all along: They were not being honest, they were not being forthright, and they were not doing the right thing from Day One.

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