If BP qualifies for $10 billion cleanup tax break, should it get one?

As the Gulf oil spill disaster wanes, attention has turned to the White House's ability to hold BP to its promise of "making the Gulf whole again."

Nearly two months after President Obama told the American people that BP would pay all cleanup costs, at least one US Senator is questioning whether the oil giant should receive a $9.9 billion tax break based on the $32 billion it expects to spend cleaning up after the Deepwater Horizon disaster.

The oil giant announced last week its intention to seek the tax break after agreeing to a deal with President Obama on June 16 to establish a $20 billion escrow account to pay financial damages related to the spill. So far, however, no money has been added to the fund amid ongoing negotiations between BP and the Department of Justice.

"The [$20 billion deal] was a moment in which [Obama] was perceived to have moved from a spectator to the one in charge, the boot on the neck idea – it was very, very important," says Bruce Buchanan, a political science professor at the University of Texas, at Austin. The tax write-off issue and the unresolved escrow deal, however, "does bring the American people back into the game," he adds.

Indeed, the $20 billion escrow account was seen as a coup for Obama and the American people, essentially guaranteeing compensation through a third-party administrator, 9/11 Trust Fund manager Kenneth Feinberg, a Washington lawyer. It also benefits BP by minimizing its liability exposure and, in turn, setting a more solid foundation for the company's rebound.

Analysts say it's also critical for the government to allow BP to keep enough cash flow to stay solvent, since a bankrupt company won't ultimately benefit aggrieved parties. BP has already lost billions of dollars in value as a result of the spill.

But the $9.9 billion proposed write-off still raised the ire of Sen. Bill Nelson (D) of Florida, who wants Senate hearings should BP go through with the write-off.

"I was appalled upon learning that BP intends to shift nearly $10 billion of the costs related to the Gulf oil spill to the backs of American taxpayers, including the very taxpayers whose lives have been devastated by the spill," Mr. Nelson wrote in a recent letter to the Senate Finance Committee, which writes tax law.

In his letter, Nelson pointed to other corporations, including Boeing and Goldman Sachs, which both decided recently against writing off a combined $1 billion of major liabilities from legal settlements. Critically, Goldman Sachs and Boeing negotiated those decisions with the SEC and lawmakers.

Tax law is written so that companies can spread tax liabilities out over time, a necessity in what can be a volatile market.

"If BP really loses the $32 billion, of course the normal rule is (and should be) that it gets a deduction, including with carryovers to other taxable years if necessary," writes University of Cincinnati law professor Paul Caron in a blog post. "So the issue, at least on its face, is a red herring."

But one government watchdog group, the nonpartisan Public Citizen, suggests that the write-off issue shows a failure of leadership from the White House.

"The administration wanted to score some quick political points by setting up the escrow account and saying … that the administration is in charge here," says Tyson Slocum, an energy sector expert with Public Citizen. "[The deal seems] flimsy as heck and BP now gets to write off a third of the relief effort. If it turns out that this was a mistake or if the administration allowed this to happen … that's a big deal."

Last week, White House press secretary Robert Gibbs insisted American taxpayers would not be on the hook for any spill cleanup costs. "I don't think anybody would prefer that [BP claims a tax credit]," Gibbs told reporters.

According to the Washington Post, Gibbs would not say whether the president would press BP on the tax deduction.

Mr. Buchanan, the political scientist, says that Obama does have a final out: The promise made was that the $20 billion is not a capped amount.

"A lot depends on what happens next and how much air time these complaints get," he says. "I wouldn't venture a guess as to whether Obama will address the tax write-off, and he always has the fallback of insisting that the old deal isn't closed until everyone is compensated, and that making taxpayers cover part of it does not constitute adequate compensation."

The main problem is that no one knows the details of the original deal, says Mr. Slocum at Public Citizen.

Meanwhile, Mr. Feinberg told the Mobile, Ala., Press-Register last week that he's ready to start processing claims from the fund, but couldn't start because "I don't want the checks to bounce." BP has until September to deposit the money. To date, BP has paid out $300 million under a BP-run claims process.

The uncertainty around the fund has many Gulf Coast residents worried. One lawsuit filed on behalf of spill victims in New Orleans demands that the full details of the compensation plan be put in writing so it can be exposed to public scrutiny.