Energy and Taxes - A View Askew

Stephen Comstock
Posted March 20, 2013

Associate editor at The Atlantic Jordan Weissmann had a provocatively titled piece yesterday on taxes and the oil natural gas industry which may have generated some traffic, but it certainly did nothing to contribute to an honest debate.  His premise was to identify tax increases on the oil and natural gas industry as a: “safe ground to set up camp for the budget negotiations.”

The US imposes tax on net income, not gross income, which means that all businesses, whether they are farmers, manufacturers or oil companies, are allowed to deduct their normal business expenses from income in calculating their tax due.  Accordingly, the oil and gas industry is eligible for business deductions that are the same as or similar to those available to other taxpayers.  Contrary to what others may say, the industry does not receive credits, does not benefit of mandates and is not directly subsidized by the federal government. Weissmann’s one-sided opinion piece attempts to state otherwise by identifying specific items – so let’s look at them:

Expensing Intangible Drilling Costs ($13.9 billion): Since 1913, this tax break has let oil companies write off some costs of exploring for oil and creating new wells.

Intangible Drilling Costs provisions allow taxpayers to deduct the labor associated with drilling operations.   While other taxpayers can deduct the labor for their ongoing operations (from selling widgets to printing magazines) so too does the oil and natural gas industry.  Like companies deduct the labor and engineering for research and new technology, so too does the oil and natural gas industry. What has been proposed is changing the amount that is deductible for tax purposes, but for just this industry.  In other words, contrary Weissmann’s claim that these are tax breaks what the Administration and the some in Congress want is to collect more taxes up front by taxing costs, not income.

Deducting percentage depletion for oil and natural gas wells ($11.5 billion): Since 1926, this has given oil companies a tax breaks based on the amount of oil extracted from its wells.

Percentage depletion broadly applies to all resource extraction industries- not just the oil and natural gas industry.  What has been proposed however is eliminating the tax provision for just one industry; such is the stuff of “tax fairness.”  It should also be noted that the oil and natural gas industry is already treated differently for purposes of this deduction as the tax law limits the industry’s ability to claim percentage depletion.

The domestic manufacturing deduction for oil and natural gas companies ($11.6 billion).

In 2004 Congress enacted the Domestic Production Activities Deduction, which sought to support manufacturing businesses and workers in the U.S.  It applies to a wide range of industries and manufacturing activities – including the printing of magazines and newspapers.  In fact, according to the IRS statistics, in 2010, the publishing industry claimed over $2B for this deduction on their returns – almost double the amount claimed by the oil and natural gas industry.

For instance, accounting rules worth about $2 billion a year to the industry let companies deduct more for the cost of developing wells as oil prices rise.

These “accounting rules” are not identified by Weissmann, but based on the link he provides to the Center for American Progress – which incidentally his entire article appears to be cribbed – he is talking about LIFO or last-in, first-out accounting.  As I have noted before, the last-in, first-out (LIFO) inventory method of accounting has been used for more than 70 years by U.S. taxpayers and is available to all U.S. taxpayers. But this somehow morphs in Weissmann’s world into a “subsidy.”

In the end Weissmann’s argument for increasing taxes on the industry boils down to: the industry makes big money and should pay big taxes.  What he doesn’t realize is the industry already does.  Take a gander at USA Today’s list of top tax paying U.S. companies, and recognize that while our industry already contributes, on average, around $85 million a day to federal government, we could indeed pay more.  But increasing taxes is not the way to do it, developing more sensible energy policies is.