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Written by Andrew Parker   
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Thursday, 11 August 2011

Oil Tax Breaks

During the debt ceiling debates this summer, President Obama advocated against the existing oil company tax breaks, stating:
If we choose to keep those tax breaks for millionaires and billionaires, if we choose to keep a tax break for corporate jet owners, if we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars, then that means we've got to cut some kids off from getting a college scholarship, that means we've got to stop funding certain grants for medical research, that means that food safety may be compromised, that means that Medicare has to bear a greater part of the burden.1
President Obama offered an argument that has become quite familiar in recent years—that oil companies already making billions of dollars in profit each year, are benefiting from tax breaks that cost the government money and could be redirected toward many other programs in need of funds. Oil companies disagree, of course, claiming that such a change would threaten America’s move toward energy independence and would unfairly single out an industry that already pays billions of dollars in taxes each year.2

The basic framework of this debate has been covered over and over by the media, but few reports have delved deeper into the issue to look at the specific tax breaks that exist, when they were created, and how much money they are worth to oil companies. That information is exactly what you will find below, and hopefully it will shed a little more light on a complex issue that receives only superficial media coverage.

Top 4 Major Tax Breaks

1. Oil Depletion Allowance
  • Enacted in 19133
  • Approximate annual value to oil companies: $1 billion4
The tax code classifies the oil sought by drilling companies as “capital equipment.” This definition makes oil companies eligible for a standard tax deduction enjoyed by many industries, which is focused on the value of equipment used for their work. In this case, the controversy comes from defining oil as “equipment.” Many argue that it is instead a natural resource and that including oil companies violates the spirit of this tax provision.5 The policy has been around for a long time. It was created in 1913, immediately after the passage of the Sixteenth Amendment provided for the income tax. The amount of the deduction has fluctuated since then, but it currently sits at 15% and provides oil companies with savings of about $1 billion per year.6

2. Intangible Drilling Costs
  • Enacted: 19137
  • Approximate annual value to oil companies: $780 million8
At nearly 100 years old, this is another longstanding tax benefit. It covers, as the name suggests, costs classified as “intangibles,” including transportation, employee salaries, and more.9 This tax provision was originally created to incentivize more oil exploration and drilling, which was quite a risky investment in the early 1900s.10

3. Foreign Tax Credit
  • Enacted: 191811
  • Approximate annual value to oil companies: $850 million12
The oil business is inherently a global one, and as a result oil companies pay taxes not just in the United States but also in countries where they drill for oil. Around the world, these companies are charged “royalties” for the use of that country’s resources and then can also be charged income tax. Under the U.S. Tax Code, oil companies are allowed to deduct the foreign income taxes, saving the industry about $850 million each year.13 Many claim that oil companies have been able to successfully claim this deduction even when they haven’t paid foreign taxes!14 This is in part due to foreign governments classifying the royalties instead as income tax, which then the companies can deduct from their U.S. income taxes.15

4. Domestic Manufacturing Tax Deduction
  • Enacted: 200416
  • Approximate annual value to oil companies: $1.7 billion17
This item, younger than the others by nearly 100 years, is also the largest deduction enjoyed by oil companies. It was created only seven years ago, and as the name implies, is focused on preserving and strengthening manufacturing activity in the United States. It provides for a 9% deduction of “income from operations that are attributed to domestic production.”18 This particular deduction has received significant criticism, with many arguing that a domestic manufacturing tax break isn’t appropriate for companies that work where the oil is.19

Politics of Oil Tax Breaks

The tax breaks listed above are only a sampling of the full list. President Obama’s 2011 budget plan, for example, highlighted these four as well as five others and recommended that they all be removed.20 Democrats have been pushing hard for the elimination of these tax breaks in recent years, but so far they have not been successful. The issue came up last year during the oil spill in the Gulf of Mexico , and was raised again earlier this year as Congressional Democrats put together a proposal to end certain tax deductions for the five largest oil companies. The plan, which was projected to net the government about $21 billion over the next ten years, received 52 votes in the Senate but fell short of the 60 needed for passage.21 Those who are critical of the oil industry’s influence in politics were quick to point out that the Senators opposing the bill received, on average, five times as much in campaign contributions from oil companies as those who voted in favor.22

President Obama brought up the tax break issue once again during the debt ceiling negotiations, but again failed to achieve any changes to the oil company tax breaks in the final deal. He signaled that he would continue to pursue this issue, saying after the debt ceiling bill was passed that the country needed to start “reforming our tax code so that the wealthiest Americans and biggest corporations pay their fair share… [and] getting rid of taxpayer subsidies to oil and gas companies, and tax loopholes that help billionaires pay a lower tax rate than teachers and nurses.”23 As long as the economy continues to struggle and oil companies continue to report large profits, these tax breaks are sure to remain a contentious issue.

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6 Id.
9 Id.
14 Id.
15 Id.;
17 Id.
18 Id.
19 Id.

22 Id.

Comments (2)
RSS comments
1. 06-04-2012 22:05
Its really strange that, why to give more money to failed "Green" companies plus end the tax credit when the fuel is on high record. but on the hand sometimes i think that people need to understand that Obama is ideologue. so for sure something great will happen.
2. 06-09-2011 21:54
Nice post... Thanks for sharing this post. 

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Last Updated ( Thursday, 11 August 2011 )