- Truth About Tax Subsidies infographic: http://www.api.org/~/media/Files/News/Infographics/The-truth-about-subsidies.pdf
- Energytomorrow.org blog – “Energy for America, Not Higher Taxes”: http://energytomorrow.org/blog/2013/july/energy-for-america-not-higher-taxes
- Energytomorrow.org blog – “Just The Facts: No Targeted Oil & Gas Tax Credits”: http://energytomorrow.org/blog/2012/january/just-the-facts-no-targeted-oil-gas-tax-credits
- API Key Tax Issues Brief:
- API Energizing America (Oct 2013): http://www.api.org/policy-and-issues/policy-items/jobs/energizing-america
- API Key tax issues briefs: http://www.api.org/policy-and-issues/policy-items/taxes/api-key-tax-issues
- Wood Mackenzie study – “Impacts of delaying IDC deductibility (2014-2025)”: http://www.api.org/policy-and-issues/policy-items/taxes/~/media/Files/Policy/Taxes/13-July/API-US-IDC-Delay-Impacts-Release-7-11-13.pdf
- Wood Mackenzie study – “U.S. Supply Forecast and Potential Jobs and Economic Impacts (2012-2030)”: http://www.api.org/newsroom/upload/api-us_supply_economic_forecast.pdf
- Website – “Who Owns Big Oil?”: http://www.whoownsbigoil.org/
- Sonecon study – “Who Owns America’s Oil and Natural Gas Companies”: http://www.api.org/statistics/earnings/upload/shapiro-pham-study_10_24_11.pdf
- Sonecon study – “Financial Contributions of Oil and Natural Gas Company Investments to Major Public Pension Plans in Seventeen States, Fiscal Years 2005-2009”: http://www.api.org/oil-and-natural-gas-overview/industry-economics/~/media/Files/News/2011/Report_Public_Pension_Funds_in_17states.pdf
America’s oil and natural gas industry supplies tens of millions of dollars 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. Sound tax policy would encourage domestic energy development and allow U.S. energy companies to compete against global rivals.
The Truth on Oil “Subsidies”
“Oil and gas subsidies are costly… Removing [them would] generate $38.6 billion of additional revenue over the next 10 years.” — President Barack Obama
“No money from the U.S. Treasury goes to the oil industry” — Washington Post
So What’s the President Talking About?
INTANGIBLE DRILLING COSTS
Since 1913, oil & gas firms have deducted the upfront costs of exploration and production. By eliminating this deduction, President Obama hopes to raise $1.5 billion annually.
Pharmaceutical companies and biotech firms deduct research and development costs up front. It’s unfair to treat oil & natural gas firms any differently.
The last-in, first-out (LIFO) inventory method of accounting has been used for more than 70 years by U.S. taxpayers and is fully recognized and regulated by the IRS.
Repealing LIFO creates an assumed tax bill without any corresponding cash gain. Taxing inventory, not income, would require companies to redirect cash or sell assets in order to cover the tax payment.
FOREIGN TAX CREDIT
U.S. taxpayers that pay foreign taxes on foreign income can take credit to avoid double taxation. By repealing this for oil & tax firms, President Obama hopes to raise $1 billion annually.
It’s unfair to subject oil & natural gas companies to double taxation. Worse, eliminating it would undermine their ability to compete internationally.
DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
Available to all taxpayers, this deduction was created to preserve U.S. manufacturing jobs. By repealing it for oil & gas firms, President Obama hopes to raise $1.4 billion annually.
Repealing this deduction for just the oil & gas industry (rather than all taxpayers) is not “tax fairness.”
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 Wood Mackenzie 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 last five years average earnings for the oil and natural gas industry have been below the rest of the U.S. manufacturing industry, averaging about 7 cents for every dollar of sales compared to nearly 9 cents for manufacturing.
By the second quarter of 2015, the average for the oil and gas industry fell to minus 0.1 cent on the dollar compared to 7.9 cents on the dollar for all U.S. manufacturing as the price collapse of crude oil took its toll on U.S. oil producers.
Profit margins provide one useful way to compare financial performance among industries of all sizes.
Oil and natural gas earnings are typically in line with the average of other major U.S. manufacturing industries, but not recently.
The latest published data for the second quarter of 2015 shows the oil and natural gas industry lost 0.1 cent for every dollar of sales in comparison with all manufacturing which earned 7.9 cents for every dollar of sales.
Growth in the world’s supply of crude oil has outpaced the growth in global demand, which has led to sharply lower prices, and lower earnings.
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
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
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.