Antique tax breaks for oil and gas industry fall out of fashion

Wednesday, April 27th, 2011 By

exxon gas price sign

Record profits, high gas prices and the current budget cutting craze could spell the end for billions in oil and gas subsidies. Image: Flickr/brownpau CC-BY-SA

On Monday, House Speaker John Boehner said he was willing to consider cutting oil company subsidies. But he backtracked later after the Obama administration responded by writing a letter to Congress urging it to eliminate tax breaks for the oil and gas industry immediately to use the money for investing in clean energy. Oil industry officials, on the eve of announcing record profits, said eliminating gas and oil subsidies would raise the price of gas and eliminate millions of jobs.

Oil industry adds taxpayer dollars to record profits

Tax breaks for the oil and gas industry cost taxpayers more than $4 billion a year in lost revenue–enough for 1.4 million Americans to buy a tank of gas every week for an entire year, according to ABC News. The official industry line is that oil and gas subsidies encourage the exploration that ensures a reliable energy supply. According to the nonpartisan Center for Responsive Politics, the industry spent $340 million on lobbyists from 2008 to 2010. But with gas prices approaching $4 a gallon and oil companies preparing to announce another round of record profits later this week, those tax breaks are getting harder to defend politically. With global oil demand and prices destined to rise indefinitely, tax breaks to encourage exploration are viewed as an anachronism by advocates of ending the subsidies.

The depletion allowance and other scams

Some tax breaks for the oil and gas industry date back nearly a century. They were intended to encourage exploration when costly investments in primitive technology often resulted in dry holes. A vestigial provision from the Tariff Act of 1913 actually allows oil companies based in the U.S. to claim greater deductions for the lost value of tapped oil fields than the companies actually pay for drilling rights. One of these provisions is known as the “depletion allowance.” The depletion allowance lets oil companies count the oil as capital equipment and allows them to write off a percentage for each barrel they pump. Eliminating it would save about $1 billion a year.

Other tax breaks date back to the Cold War. To counter Soviet influence in the Middle East in the 1950’s, the State Department let oil companies reclassify the royalties they pay to foreign governments as an income tax, allowing them to deduct 100 percent of those royalties from their tax liability–a practice that will cost taxpayers $8.2 billion in lost revenue in the next decade.

The Transocean/BP tax dodge

A common oil company tax dodge is using foreign tax havens. When the Deepwater Horizon oil rig exploded and sank in the Gulf of Mexico, it was flying the flag of the Marshall Islands to circumvent taxes and safety regulations. To avoid paying U.S. taxes, the rig’s owner, Transocean, moved its corporate headquarters from Houston to the Cayman Islands in 1999. In 2008, it moved its so-called headquarters, staffed by about a dozen people, to Switzerland. According to the trade publication Tax Analysts, by moving its symbolic headquarters overseas Transocean avoided paying $1.8 billion in U.S. taxes from 1999 to 2009. Tax breaks permeate every aspect of the oil and gas industry. While BP leased the Deepwater Horizon, it wrote off 70 percent of the rent–a deduction of about $225,000 a day.


New York Times

ABC News

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