Taxes and Big Oil

[Bert 1,128]

Wall Street Journal

Big Oil, Bigger Taxes

The industry sends more money to Washington than to shareholders

Wall Street Journal editorial

 

March 14, 2012

 

President Obama says he wants to end subsidies for what he calls "the fuel of the past," but lucky for him oil and gas will be the fuels of the future too. His budget-deficit blowout would be so much worse without Big Oil, because the truth is that this industry is subsidizing the government.

Much, much worse, actually. The federal Energy Information Administration reports that the industry paid some $35.7 billion in corporate income taxes in 2009, the latest year for which data are available. That alone is about 10% of non-defense discretionary spending—and it would cover a lot of Solyndras. That figure also doesn't count excise taxes, state taxes and rents, royalties, fees and bonus payments. All told, the government rakes in $86 million from oil and gas every day—far more than from any other business.

Not paying their "fair share"? Here's a staggering fact: The Tax Foundation estimates that, between 1981 and 2008, oil and gas companies sent more dollars to Washington and the state capitols than they earned in profits for shareholders.

Exxon Mobil, the world's largest oil and gas company, says that in the five years prior to 2010 it paid about $59 billion in total U.S. taxes, while it earned . . . $40.5 billion domestically. Another way of putting it is that for every dollar of net U.S. profits between 2006 and 2010, the company incurred $1.45 in taxes. Exxon's 2010 tax bill was three times larger than its domestic profits. The company can stay in business because it operates globally and earned a total net income after tax of $30.5 billion in 2010 on revenues of $370.1 billion.

Meanwhile, Mr. Obama's 2013 budget—like its 2012, 2011 and 2010 vintages—includes a dozen-odd tax increases that would raise the industry's liability by $44 billion over the next decade, according to the White House, and by $85 billion, according to the trade group the American Petroleum Institute (API). At any rate, the President's economists ought to be weeping for joy for the revenue windfall from an industry that grew 4.5% in 2011, compared to overall GDP growth of 1.7%.

Crunching Compustat North America numbers, API estimates that the average effective tax rate for oil and gas companies is 41.1% for 2010—i.e., taxes as a share of net income. That is broadly in line with the Energy Information Administration's estimates for "major energy producers." By the same measure, other manufacturers on the S&P Industrial index pay an effective rate of 26.5%.

Specific oil and gas investments are also taxed at higher rates than other energy plays, which were surveyed in a 2009 paper by economist Gilbert Metcalf, now a deputy assistant Treasury secretary. He found that oil drilling (for an integrated company) clocks in at a 15.2% tax rate, refining at 19.1% and building a natural gas pipeline at 27%.

For comparison, nuclear power comes in at minus-99.5%, wind at minus-163.8% and solar thermal at minus-244.7%—and that's before the 2009 Obama-Pelosi stimulus. In other words, the taxpayer loses more the more each of these power sources produces.

As for the "subsidies" that Mr. Obama says the oil industry receives, these aren't direct cash handouts like those that go to the green lobby. They're deductions from taxes that cover the cost of doing business and earning income to tax in the first place. Most of them are available to other manufacturers.

What Mr. Obama really means is that he wants to put the risky and capital-intensive process of finding, extracting and producing oil and gas at a competitive disadvantage against other businesses. He does so because he ultimately wants to make them more expensive than his favorites in the wind, solar and ethanol industries.

Why he would still want to do this amid the political panic over $4 per gallon gasoline is a mystery. Even Mr. Obama now claims to want lower gas prices, commenting recently that "Do you think the President of the United States going into re-election wants gas prices to go up higher?" Too bad his every policy choice, and especially his tax agenda, would lead to higher prices.

[DankNuggs 305]

"Oil and gas Subsidies" has been proven to be a completely bogus soundbyte... Obama is being dishonest in his descripition of tax code that affects all manufacturing, including his favorite child AAPL which makes a killing by sending their manufacturing to china...

 

 

He makes it seem like there are huge revenue streams being diverted towards the gas people, its a lie...

 

 

"The problem with socialism, is that eventually you run out of other peoples money"

 

Margaret Thatcher

[DanXIII 8]

"Oil and gas Subsidies" has been proven to be a completely bogus soundbyte...

 

Really? So they are a myth? I did not know that. Thanks for the education bro

[Recliner Pilot 61]

I hate to burst your bubble Bert, but your article is clearly wrong cuz Hoytdcorky says oil companies don't pay any taxes in the U. S.

[DankNuggs 305]

Really? So they are a myth? I did not know that. Thanks for the education bro

A subsidy implies that the oil/gas companies are being treated differently and better than others.

 

The fact it is simply the tax code that affects all manufacturing means everyone under the code is being treated fairly... No favored sons...

 

 

Its dishonest.

[nikki2200 4]

A subsidy implies that the oil/gas companies are being treated differently and better than others.

 

The fact it is simply the tax code that affects all manufacturing means everyone under the code is being treated fairly... No favored sons...

 

 

Its dishonest.

 

Isn't this all about the Energy Policy Act of 2005?

[penultimatestraw 473]

A subsidy implies that the oil/gas companies are being treated differently and better than others.

 

The fact it is simply the tax code that affects all manufacturing means everyone under the code is being treated fairly... No favored sons...

 

 

Its dishonest.

Doesn't the definition of subsidy apply independent of what other companies receive?

a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public

So your argument is all manufacturing benefits from the following:

TAX SUBSIDIES

 

The federal government provides the oil industry with numerous tax breaks designed to ensure that domestic companies can compete with international producers and that gasoline remains cheap for American consumers. Federal tax breaks that directly benefit oil companies include: the Percentage Depletion Allowance (a subsidy of $784 million to $1 billion per year), the Nonconventional Fuel Production Credit ($769 to $900 million), immediate expensing of exploration and development costs ($200 to $255 million), the Enhanced Oil Recovery Credit ($26.3 to $100 million), foreign tax credits ($1.11 to $3.4 billion), foreign income deferrals ($183 to $318 million), and accelerated depreciation allowances ($1.0 to $4.5 billion).

 

Tax subsidies do not end at the federal level. The fact that most state income taxes are based on oil firms' deflated federal tax bill results in undertaxation of $125 to $323 million per year. Many states also impose fuel taxes that are lower than regular sales taxes, amounting to a subsidy of $4.8 billion per year to gasoline retailers and users. New rules under the Taxpayer Relief Act of 1997 are likely to provide the petroleum industry with additional tax subsidies of $2.07 billion per year. In total, annual tax breaks that support gasoline production and use amount to $9.1 to $17.8 billion.

 

PROGRAM SUBSIDIES

 

Government support of US petroleum producers does not end with tax breaks. Program subsidies that support the extraction, production, and use of petroleum and petroleum fuel products total $38 to $114.6 billion each year. The largest portion of this total is federal, state, and local governments' $36 to $112 billion worth of spending on the transportation infrastructure, such as the construction, maintenance, and repair of roads and bridges. Other program subsidies include funding of research and development ($200 to $220 million), export financing subsidies ($308.5 to $311.9 million), support from the Army Corps of Engineers ($253.2 to $270 million), the Department of Interior's Oil Resources Management Programs ($97 to $227 million), and government expenditures on regulatory oversight, pollution cleanup, and liability costs ($1.1 to $1.6 billion).

 

PROTECTION SUBSIDIES

 

Beyond program subsidies, governments, and thus taxpayers, subsidize a large portion of the protection services required by petroleum producers and users. Foremost among these is the cost of military protection for oil-rich regions of the world. US Defense Department spending allocated to safeguard the world's petroleum resources total some $55 to $96.3 billion per year. The Strategic Petroleum Reserve, a federal government entity designed to supplement regular oil supplies in the event of disruptions due to military conflict or natural disaster, costs taxpayers an additional $5.7 billion per year. The Coast Guard and the Department of Transportation's Maritime Administration provide other protection services totaling $566.3 million per year. Of course, local and state governments also provide protection services for oil industry companies and gasoline users. These externalized police, fire, and emergency response expenditures add up to $27.2 to $38.2 billion annually.

[nikki2200 4]

Doesn't the definition of subsidy apply independent of what other companies receive? So your argument is all manufacturing benefits from the following:

 

That does sound a lot like they are talking about Bush's 2005 Energy Bill. Which was specifically for the energy industries. Not sure how makers of toothpaste or door handles could benefit from that.

[Bert 1,128]

That does sound a lot like they are talking about Bush's 2005 Energy Bill. Which was specifically for the energy industries. Not sure how makers of toothpaste or door handles could benefit from that.

 

I believe he is talking about things like bonus depreciation.

[nikki2200 4]

I believe he is talking about things like bonus depreciation.

 

Right. Things that were outlined in the 2005 Energy Bill. For energy companies.

[Mungwater 597]

Right. Things that were outlined in the 2005 Energy Bill. For energy companies.

 

Bert has a good almost 20 years in this field, I'd take his word for it

[nikki2200 4]

Bert has a good almost 20 years in this field, I'd take his word for it

 

Take his word for what?

 

Dank is the one who said that any manufacturing company could take advantage of the same tax benefits as the oil industry. I asked the question because I thought this whole thing pertained to amending the 2005 Energy Bill. I could be wrong, but that's where I thought this was all coming from.

[Bert 1,128]

Take his word for what?

 

Dank is the one who said that any manufacturing company could take advantage of the same tax benefits as the oil industry. I asked the question because I thought this whole thing pertained to amending the 2005 Energy Bill. I could be wrong, but that's where I thought this was all coming from.

Nikki,

 

The section 179 deduction came in in the early 80's and has been increased and modified several times. I have heard several people claim this is a "Big Oil loop hole". This deduction is open to any business not just big oil. What I believe Dank is pointing out is there are many things in the tax code that get labeled as loop holes/subsidies/deductions for big oil when in fact they are available for all corporations.

[nikki2200 4]

Nikki,

 

The section 179 deduction came in in the early 80's and has been increased and modified several times. I have heard several people claim this is a "Big Oil loop hole". This deduction is open to any business not just big oil. What I believe Dank is pointing out is there are many things in the tax code that get labeled as loop holes/subsidies/deductions for big oil when in fact they are available for all corporations.

 

Oh OK. For some reason I thought this was about repealing portions of the Energy Bill.

 

Thanks.

[parrot 789]

Nikki,

 

The section 179 deduction came in in the early 80's and has been increased and modified several times. I have heard several people claim this is a "Big Oil loop hole". This deduction is open to any business not just big oil. What I believe Dank is pointing out is there are many things in the tax code that get labeled as loop holes/subsidies/deductions for big oil when in fact they are available for all corporations.

 

Hey Bert, do you know if the changes to the foreign tax credit that were proposed last year passed? I know that's one tax provision where many people felt like oil companies were gaming the system somewhat.

[Bert 1,128]

Hey Bert, do you know if the changes to the foreign tax credit that were proposed last year passed? I know that's one tax provision where many people felt like oil companies were gaming the system somewhat.

 

I don't deal too much with the foreign tax credit but I believe they changed the rule in late 2010 early 2011. Basically a company can't claim the credit for foreigh tax paid until they bring the income back into the country.

[Recliner Pilot 61]

I don't deal too much with the foreign tax credit but I believe they changed the rule in late 2010 early 2011. Basically a company can't claim the credit for foreigh tax paid until they bring the income back into the country.

Speaking of bringing money back into the country, the FairTax folks claim there is somewhere around $13 Trillion parked overseas because of the tax liability incurred if this money is brought into the U.S. and invested.

 

Their plan wouldn't tax this money at all if it is brought into the U.S. and invested. If they are correct, that is potentially a $13 Trillion "stimulus" in the hands of business, not Obama. I think that might jumpstart the economy.

 

What is your opinion of this, Bert?

[Bert 1,128]

Speaking of bringing money back into the country, the FairTax folks claim there is somewhere around $13 Trillion parked overseas because of the tax liability incurred if this money is brought into the U.S. and invested.

 

Their plan wouldn't tax this money at all if it is brought into the U.S. and invested. If they are correct, that is potentially a $13 Trillion "stimulus" in the hands of business, not Obama. I think that might jumpstart the economy.

 

What is your opinion of this, Bert?

 

I think the $13 Trillion, like several claims from the FairTax people, is over blown. Not all overseas money is "parked" and therefore would not be reinvested in the US. That being said I do believe that a large amount of money would be brought back in if it could be moved without the tax liability.

[Recliner Pilot 61]

I think the $13 Trillion, like several claims from the FairTax people, is over blown. Not all overseas money is "parked" and therefore would not be reinvested in the US. That being said I do believe that a large amount of money would be brought back in if it could be moved without the tax liability.

Even if it's only half, or hell, 25% of what they think it would be huge for the economy.

[TD Ryan2 316]

Speaking of bringing money back into the country, the FairTax folks claim there is somewhere around $13 Trillion parked overseas because of the tax liability

 

interesting.

'splain this to me please (you or Bert or someone who understands Tax/Oil/etc betterer than I).

Why/How is this money "parked" over seas? Is it b/c of a corporate HQ being overseas to avoid the taxes to begin with? You know, like those companies with 20,000 employees in Texas but a 1-mailbox corporate HQ in Europe?

 

The whole concept of money being "parked" outside our US economy and unable to return seems like a big deal and a possible solution - so I'm just asking to understand it all better.

 

thanks.

[Bert 1,128]

interesting.

'splain this to me please (you or Bert or someone who understands Tax/Oil/etc betterer than I).

Why/How is this money "parked" over seas? Is it b/c of a corporate HQ being overseas to avoid the taxes to begin with? You know, like those companies with 20,000 employees in Texas but a 1-mailbox corporate HQ in Europe?

 

The whole concept of money being "parked" outside our US economy and unable to return seems like a big deal and a possible solution - so I'm just asking to understand it all better.

 

thanks.

 

This isn't just about oil companies. Every major US company with foreign operations has the same problem. This is becoming a huge issue with Tech companies.

 

The problem is created by the fact that the US Corporate tax rate is so much higher than most of the world. Here is a very simple example. USACO has a sub in Fiji. They have before tax income last year of $10 million. They pay the 20% Fiji corporate income tax. So now USACO has $8 million cash it can use in its business. If they use the money in the US or pay dividends they will have to pay the differnce between the Fiji rate and the US rate (an additional 15%). Instead of using the money in the US the leave it offshore (they park it)for us in Fiji or other countries.

[TD Ryan2 316]

This isn't just about oil companies. Every major US company with foreign operations has the same problem. This is becoming a huge issue with Tech companies.

 

The problem is created by the fact that the US Corporate tax rate is so much higher than most of the world. Here is a very simple example. USACO has a sub in Fiji. They have before tax income last year of $10 million. They pay the 20% Fiji corporate income tax. So now USACO has $8 million cash it can use in its business. If they use the money in the US or pay dividends they will have to pay the differnce between the Fiji rate and the US rate (an additional 15%). Instead of using the money in the US the leave it offshore (they park it)for us in Fiji or other countries.

thanks man -

yeah, I'm somewhat familiar with this whole concept of US Corp. Taxes being so high the companies keep their money "away" from it.

And I do realize that it's not just Oil companies.

 

So... seems to me that this is a pretty big deal - I would think that our government would want to find a creative way to encourage these companies to "unpark" all that money?

 

also, the HomeRun soundbyte in this thread is:

"The Tax Foundation estimates that, between 1981 and 2008, oil and gas companies sent more dollars to Washington and the state capitols than they earned in profits for shareholders."

 

Translation: Wow! you thing Big Oil is bad? Government in worse.