America’s oil and natural gas industry supplies $85 million a day to the U.S. Treasury in the form of income taxes, rents, royalties and other fees. That adds up to more than $30 billion a year. With pro-energy development policies it could produce $800 billion in additional cumulative revenue to the government by 2030, according to a study by Wood Mackenzie. Conversely, increasing taxes on America’s oil and natural gas companies could result in more than $220 billion in lost revenue to government. Needed is sound tax policy that encourages greater energy development and helps U.S. energy companies compete against global rivals.

It’s a well-circulated myth that America’s oil and natural gas industry receives federal subsidies. Subsidies are cash outlays from the U.S. Treasury, and industry doesn’t get them. Similarly, there are no targeted tax credits currently being used by industry. Legitimate tax treatments used by oil and natural gas companies – similar to those used by other business sectors – regularly come under attack by those pushing for higher taxes on energy companies.

For example, the expensing of intangible drilling costs (IDC) is a favorite target. Created in 1913, it allows oil and natural gas companies to expense ongoing business costs – such as site preparation and labor that accrue whether the well produces oil or natural gas or is a dry hole. IDC is much like the research and development deduction enjoyed by other industries, and eliminating it would increase production costs and discourage new energy development.

One study estimates 190,000 Americans would be unemployed next year if IDC is repealed, growing to 265,000 jobs lost over a decade. Fewer wells drilled and decreased energy investment could cause domestic oil and natural gas production to fall 14 percent below current expectations after 10 years, the study said

IDC isn’t the only issue. There are other examples, including the Domestic Production Activities Deduction, the Modification of Dual Capacity Rule and LIFO, the “last-in, first-out” accounting method, which falsely get called subsidies or tax breaks. Singling out the oil and natural gas industry for tax increases by taking away a provision like the Domestic Production deduction – used by virtually all U.S. businesses – would likely increase costs, hurt production and curb job growth.

Discussion of the oil and natural gas industry’s fair tax responsibility often follows industry earnings reports. Over the past five years average earnings for the oil and natural gas industry have been well in line with the rest of U.S. manufacturing, averaging 7 cents for every dollar of sales.

By the second quarter of 2014,the average for the oil and gas industry was close tothe same, but increased to 9.3 cents on the dollar for all U.S. manufacturing as the economy continued to recover.

Meanwhile, other industry sectors are reporting higher per-dollar-of-sales earnings. Key point: Earnings or profits reflect the size of an industry, but they’re not necessarily a good barometer of financial performance. Profit margins, or earnings per dollar of sales (measured as net income divided by sales), provide a useful way to compare financial performance among industries of all sizes.

An industry’s earnings reflect its ability to stay competitive domestically and around the world while benefiting shareholders – millions of them regular Americans. Healthy earnings also mean an industry can invest in innovative technologies that improve the environment while keeping America going strong.

U.S. oil and natural gas companies pay considerably more in taxes than the average manufacturing company. In 2013 income tax expenses (as a share of net income before income taxes) averaged 40.2 percent, comparedto 25.2 percent for other S&P Industrial companies.

The U.S. oil and natural gas industry also pays thefederal government significant rents, royalties and lease payments for production access – totaling more than $119 billion since 2000. In fact, U.S. oil and natural gas companies pay more than $84 million dollars to the federal government in both income taxes and production fees every single day.

5GICS Industry Group Code 1010.
6S&P Industrials are extracted from the S&P 1500 by excluding companies in the Financials (GICS Sector = 40), Utilities (GICS Sector = 55), and Transportation (GICS Industry Group = 2030).

U.S. based oil and gas companies must structure their operations and invest substantial capital where the resource is found rather than where the best tax regime is located. As a result, U.S. based oil and gas companies’ overseas income is often subject to very high effective tax rates. In addition, operations in the U.S. generate state income tax obligations or payments, which are in addition to federal taxes. This is why the industry has an effective tax rate above the federal statutory rate of 35 percent.

Retailers are placed in a similar situation as they must naturally align their locations with customers, which can lead to higher effective tax rates. Other industries, though, may have greater flexibility on where they locate their physical capital or other operations to meet their customer needs. As a result, they may be able to establish activities in locations with lower effective tax rates.

The Smart Path Forward

the consequences of higher taxes

Often lost in the political discussion of raising taxes on oil and natural gas companies is the negative effect of higher costs on production, job creation and – ironically – revenue generation for government. A study by Wood Mackenzie quantifies the impact of the administration’s proposal for more than $90 billion in additional taxes and fees on oil and natural gas companies over a 10-year period: 48,000 jobs lost and 700,000 barrels’ worth of oil and natural gas per day lost by 2020. The kicker: Raising taxes would actually lose the government $29 billion by 2020.

There’s a better path to raising additional revenue for government: Increase access to resources and allow more oil and natural gas development. More revenue for government, more jobs, more energy.

Tax Policy and Effects on Americans’ Investments

who owns big oil

No discussion of taxes and the U.S. oil and natural gas industry is complete without acknowledging the potential impact of higher taxes on regular Americans – the true owners of “Big Oil.” If you have a mutual fund account, and 57 million U.S. households do, there’s a good chance it invests in oil and natural gas stocks. If you have an IRA or personal retirement account, and 46 million U.S. households do, there’s a good chance it invests in energy stocks. If you have a pension plan, and 61 million U.S. households do, odds are it invests in oil and natural gas.

A strong oil and natural gas industry is a vital part of the retirement security for millions of Americans. A common misconception is America’s oil and natural gas companies are owned – and therefore benefit – a small group of insiders. In fact, just 2.9 percent of industry shares are owned by corporate management. The rest are owned by tens of millions of Americans, many of them middle class.