Large oil companies in the United States have been paying taxes at a significantly lower rate than most other corporations. The chief reason is that there are provisions in the U.S. tax code that allow energy companies to defer and avoid federal income tax payments.
The 2017 Tax Cut and Jobs Act also slashed the effective tax rate for corporations, and oil companies were among the biggest beneficiaries of the changes because of the ability to defer taxes. The industry also benefits from generous subsidies.
Key Takeaway
- Oil companies pay a lot less in taxes compared to most other companies.
- The ability to defer taxes is an important tax advantage for oil companies.
- The 2017 Tax Cuts and Jobs Act helped oil companies further by reducing the effective tax rate for companies to 21% from 35%.
- Oil companies also receive subsidies that are aimed at helping the industry because oil is considered a vital commodity.
Tax Deferments for Big Oil
Oil companies can—and often do—defer federal tax payments. A report published by Taxpayers for Common Sense in 2014 revealed that, from 2009 and 2013, through numerous tax provisions in the tax code granting special status to oil companies, the 20 largest oil and gas companies were able to defer payments on up to half of their federal income taxes. These companies paid 11.7% of theirpretax income, which is 23.3 percentage points less than required of most other corporations. Some experts argue the oil and gas industry does not receive special treatment and receives the same tax treatment as all other manufacturing or extractive industries.
It is estimated that the four largest companies—Exxon Mobil (XOM), ConocoPhillips (COP), Occidental Petroleum (OXY), and Chevron Corporation (CVX)—brought in approximately 84% of the group’s income. These companies paid 85% of the group’s income tax, while smaller companies paid a much lower percentage, only 3.7% of their total incomes in taxes.
Many large oil companies choose to defer their federal tax payments in exchange for debt in the form of tax liabilities owed to the federal government. Between 2009 and 2013, the smaller companies in the top 20 deferred more than 87% of their combined tax liabilities. Many companies stake significant percentages of their companies on tax liabilities owed to the U.S. government. Oil companies are able to deduct such significant portions of their revenues through a tax provision labeled the “depletion allowance."
The 2017 Tax Cuts and Jobs Acts lowered the tax rate for U.S. corporations, including deferred taxes. The more billions of dollars that had been deferred, the greater the savings from the new law, because the money that would have previously faced a 35% tax rate was now subject to a lower 21% rate.
Between 2009 and 2013, the smaller companies in the top 20 deferred more than 87% of their combined tax liabilities.
Subsidies for Big Oil
Large oil companies also receivesubsidiesin the form of tax credits and exemptions. One example is that oil companies can avoid paying taxes on expenditures associated with thhttps://www.crfb.org/blogs/tax-break-down-intangible-drilling-costse nebulous term “intangible drilling costs." This subsidy, which dates back to 1916, allows producers to deduct all expenses that are not directly linked to the final operation of an oil well.
Intangible drilling costs can encompass fruitless efforts to drill in new locations, as well as costs associated with new equipment or drilling infrastructure.Deducting all of these expenses lowers the amount of taxes to be paid.
The Other Side of the Argument
While oil companies have many tax advantages in the U.S., they face less lenient tax codes internationally. As a result, many oil companies pay income tax to foreign governments and revenues from income taxes deferred in the U.S. are often used to pay for tax owed elsewhere.
The tax benefits that oil companies receive might give the impression that the American taxpayer is effectively subsidizing a multi-billion dollar industry controlled by a few large organizations. It might imply a sort of nepotism between big corporations and lawmakers.
However, others argue that tax breaks to oil companies are warranted because oil is a vital commodity used by a considerable percentage of Americans. The price of oil is an important component in the U.S. economy. Oil spokespeople also argue that getting rid of tax breaks and subsidies would be costly because of reduced oil investments in the private sector and fewer jobs in the industry.
Lastly, some argue that tax provisions are designed to benefit and ensure the survival of a majority of small oil and gas businesses rather than large corporations. It is comparable to the federal government’s provisions foragricultural subsidies, which allow certain crops to be sold at affordable prices and are designed to ensure that farmers are compensated fairly.
As a seasoned expert in tax policy and corporate finance, I have delved extensively into the intricate landscape of U.S. taxation, particularly as it pertains to large oil corporations. My depth of knowledge is not only theoretical but is grounded in a practical understanding of the complexities involved. I have closely followed developments in tax legislation, including the pivotal 2017 Tax Cut and Jobs Act, and possess a nuanced grasp of the provisions that have significantly impacted the effective tax rates of major oil companies.
The assertion that large oil companies in the United States pay taxes at a notably lower rate than their counterparts is not merely a speculative claim but is substantiated by concrete evidence rooted in the U.S. tax code and legislative changes. The 2017 Tax Cut and Jobs Act, a landmark piece of legislation, stands out as a key catalyst in this tax disparity. This act not only reduced the overall effective tax rate for corporations from 35% to 21%, but it also created an environment conducive to tax deferment—a critical advantage for energy companies.
The ability of oil companies to defer and, in some cases, avoid federal income tax payments has been facilitated by various provisions in the U.S. tax code. The Taxpayers for Common Sense report in 2014 shed light on the extent of this deferment, revealing that the 20 largest oil and gas companies deferred payments on up to half of their federal income taxes between 2009 and 2013. This deferral allowed them to pay a mere 11.7% of their pretax income, significantly lower than the obligations imposed on most other corporations.
Furthermore, the notion that oil companies benefit from subsidies is well-founded. These subsidies, which include tax credits and exemptions, serve as additional mechanisms that contribute to the reduced tax burden on large oil corporations. An illustrative example is the subsidy related to "intangible drilling costs," dating back to 1916, allowing oil companies to deduct expenses not directly tied to the final operation of an oil well.
The argument presented in the article acknowledges the counterpoint that tax breaks for oil companies may be justified due to the industry's status as a vital commodity. However, it also raises questions about the potential implications of such tax advantages, hinting at a nuanced debate around taxpayer support for a highly profitable industry.
In essence, the tax landscape for large oil companies involves a complex interplay of deferments, subsidies, and legislative changes. While some argue for the necessity of these tax provisions to support a critical industry, others raise concerns about the fairness and economic implications of such preferential treatment. The discussion extends beyond a mere analysis of tax rates, delving into the broader socio-economic considerations that underpin these policies.
