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“Busting the Myths of Oil and Gas Taxation”

Scott HodgePresident

202-464-6200www.TaxFoundation.org

Obama’s Pledge“We need to get behind this innovation. And to help pay for it, I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. (Applause.) I don't know if — I don't know if you've noticed, but they're doing just fine on their own. (Laughter.) So instead of subsidizing yesterday's energy, let's invest in tomorrow's.”

-- State of the Union Address, January 25, 2011

“Close Tax Loopholes Act” (S. 940)

Deny FTC for “dual capacity” taxpayers

Deny Domestic Manufacturing Deduction (“199 Deduction”)

Deny deduction for intangible drilling and development costs

Deny percentage depletion allowance for oil and gas wells

Deny deduction for tertiary injection expenses

Basic Flaws

When you tax something you get less of it – see tobacco

Violate many basic principles of sound tax policy.

Sets bad precedent of using tax code as political weapon

Two Myths

Myth 1: Oil Industry does not pay its “fair share” of taxes

Myth 2: Oil industry benefits from billions of dollars in tax benefits

Jan-

80

Jan-

82

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84

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86

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90

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92

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96

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98

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00

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Jan-

04

Jan-

06

Jan-

08

Jan-

10

$0

$20

$40

$60

$80

$100

$120

$140

Third Myth: Some Guy in Houston is Setting World Price of Oil

Short Term Energy Outlook-July 2010

Real Price

Nominal Price

Dollars Per Barrel

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

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2002

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2007

2008

$0

$20

$40

$60

$80

$100

$120

$140

$160

Since 1981, Taxes Collected from Oil Industry HaveExceeded Company Profits by Nearly 40 Percent

Excise Taxes Income Taxes Severance/Property/Windfall Profits Consolidated Profits

$Bill

ions

of 2

009

Dol

lars Cumulative Profits = $1.42 Trillion

Cumulative Taxes = $1.96 Trillion

Source: Energy Information Administration

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

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2007

2008

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Foreign Income Taxes Paid by Oil Industry: 1981 to 2008

Canada Europe and Former Soviet Union Africa Middle East Other Eastern Hemisphere Other Western Hemisphere

Bill

ions

of 2

009

dolla

rs

Source: Energy Information Administration

Tax Rates Paid by “Big Oil” in Other Countries

Norway Nigeria Saudi Arabia UAE0%

10%

20%

30%

40%

50%

60%

70%

80%

90%78%

85% 85%

55%

Tax R...

Bad Tax Policy Warning #1

Denying foreign tax credits violates basic principle against double taxation

All tax systems should protect against double taxation – and most do

U.S. companies would pay 78% to Norway then again pay 35% U.S. rate

Major Categories of Tax Expenditures FY 2011

Charitable Deduction -- Individuals

Aid to State & Local Tax Governments

Mortgage Interest Deduction

Corporate Total

Refundable Outlays

Exclusion for Pensions/401(k)s

Exclusion for Health Insurance

$0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200

$46.2

$86.9

$88.7

$102.4

$108.2

$135.4

$173.7

$Billions

Budgetary Cost of Corporate Tax Expenditures Total $653 Billion

between 2012 - 2016

Bond Exclusions

Charity/Social Policy

Available to All Firms

Industry Specific

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500

$100.0

$50.6

$448.5

$54.2

$Billions of Current Dollars

Source: Budget of the U.S. 2012

Renewables Get Twice the Tax Benefits of Other Energy Sources

Oil & Gas Coal & Minerals Renewables $-

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$5.8 $6.0

$12.0 Value of Tax Provisions 2012 to 2016 in $Bil-lions

Domestic Manufacturing Activities Deduction – “Section

199” Cuts effective rate from 35% to 32% --

except for oil companies (33%) Available to all domestic manufacturers –

C-corps, S-corps, farmers, individuals Qualified activities include the

manufacture, production, growth, or extraction of: clothing, goods, food, software, music recordings, movies, electricity, roads, power lines, autos, toys, etc. for retail consumption only.

Bad Tax Policy Warning #2 Tax policy should not be used to

punish one activity over another – arbitrary

If deny 199 for oil companies, then why keep it for automakers, asphalt layers, tire & toy makers, synthetic clothing, etc.?

Why stop at “big oil.” Next for targeting: sugary drinks, fatty foods, alcoholic beverages, guns, political target de jure.

Image Problem IDCs, Tertiary, Percentage over cost

depletion all identified as “tax expenditures” by JCT & Treasury

Perception that tax benefit exceeds costs How do you get out of the spotlight? Can you fold these into broader policies

– R&D or depreciation? Are you willing to give up for a lower

corporate rate?

Bad Tax Policy Warning #3

If this rhetoric succeeds…

…it means…

A tax on independents Higher taxes on domestic

production, exploration, and drilling

Leads to…

Fewer independents Less domestic

production, exploration, drilling

Increased dependence on foreign oil.

Higher prices at the margin

Take Aways Oil industry pays more than its share of

taxes. Governments “profits” no matter what the

price of oil. Tax preferences for business are smaller

than what people think – preferences for oil and gas are an even smaller fraction.

More tax loopholes for solar, wind, ethanol and switchgrass than oil and gas.

Any closing of loopholes should be done within the context of fundamental tax reform.

When you tax something, you get less of it. Why do we want less domestic production of oil?