Eschew Obfuscation

Oil Company Tax Breaks

Posted by Max Dunn Wed, 07 Jul 2010 03:05:00 GMT

I have long heard that oil companies get a lot of special tax breaks, but no-one has ever been able to explain clearly what those tax breaks actually are. Now an article in the New York Times As Oil Industry Fights a Tax, It Reaps Subsidies provides the best explanation I have seen. Some of these tax breaks are:

1. Moving corporate headquarters offshore to avoid taxes in the US
2. Capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general
3. Leasing rigs, like the Deepwater Horizon, to take advantage of a special oil industry tax break that allows them to write off 70% of the leasing cost
4. A lingering provision from the Tariff Act of 1913 that allows many small and midsize oil companies based in the United States to claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights
5. Reclassifying the royalties charged by foreign governments to American oil drillers as taxes which entitles the companies to subtract those payments from their American tax bills

While some of these ploys are also employed by other industries, like moving their headquarters outside the US, the US tax code makes it especially easy and profitable for oil companies to employ these tactics.

Furthermore, many of these tax breaks no longer have any valid reason for existence since they were enacted a century ago to encourage oil exploration in the fledgling industry and then later in the 50s to decrease Soviet influence in the Middle East.

It is estimated that these tax breaks averaged $12 billion from 2006 to 2008. While this is a large number, it is only a small fraction of the $280 billion the oil industry was taxed in this period.

Nonetheless, with a growing deficit, dismantling these archaic tax breaks for the oil industry would raise badly needed revenue and help reduce the unfair advantage that the oil industry holds over cleaner forms of sustainable energy.