The Truth About Taxes on Oil and Natural Gas Taxes

Posted on: April 4th, 2013 by NoGreenSlime No Comments

An op-ed by PIOGA’s Lou D’Amico, published here in the Johnstown Tribune-Democrat, digs into the U.S. Tax Code to show the oil and gas industry does not get any “tax breaks,” as claimed by many politicians:  Read more:

The Tribune Democrat, Johnstown, PA

March 27, 2013

Louis D’Amico | Stop the drumbeat for higher taxes on oil and gas

Louis D’Amico

— There he goes again. In a recent speech in Norfolk, Va., President Obama once again proposed to raise taxes on oil companies.

Reprising a theme repeated often during his first term, the president said he wants to “close loopholes for the well-off and the well-connected,” including “oil companies … who are all doing very well and don’t need these tax loopholes.”

Pennsylvania is in an enviable position among our country’s oil- and natural gas- producing states. It has been home to small, independent producers for many decades and is now welcoming the largest energy companies in the world, seeking to explore the Marcellus and Utica shale formations. Pennsylvania’s industry has paid an estimated $1.2 billion to local, county and state governments in the past six years.

Nationally, the oil and gas industry sends an average of about $86 million to the federal government every day in lease payments, royalties and other fees. Looking to the future, a study by IHS Global estimates state and federal taxes from unconventional oil and gas development in the United States will total $2.5 trillion by 2035.

Bashing oil and gas companies is nothing new, and the president is among a number of elected officials looking for these types of populist platforms to reduce the nation’s $16 trillion-plus budget gap.

The anti-oil and natural gas industry message, however, is based on a faulty premise: That the oil companies are somehow receiving favorable tax treatment at the expense of middle-class families.

In truth, several provisions in the U.S. Tax Code actually discriminate against oil and natural gas companies, especially the large, integrated companies whose operations include refining and marketing, as well as exploration and production.

A dissection of U.S. tax policy on oil and natural gas might be a boring exercise to the average person, but it deserves a factual explanation.

The first discriminatory provision is the percentage depletion deduction that is available to all industries that extract metals, minerals or energy from the ground. It allows companies to recover a percentage of their leasing costs by applying a deduction to their gross income. Gold, iron, clay and other mining companies are allowed to take this deduction, but integrated oil and gas companies are not. They are specifically excluded by the tax code.

Likewise, large oil producers are unable to fully exercise the intangible drilling costs provision, which allows companies to accelerate the deduction of some drilling costs. The goal of this provision is sound: It encourages the continuous production of oil and natural gas so consumers will have a steady supply of domestic energy.

Companies engaged solely in exploration and production can claim this deduction during the year that the costs are incurred. But the integrated companies can deduct only

70 percent in the first year and deduct the remainder over five years.

Among the most blatant anti-oil tax disadvantages is Section 199, known as the domestic manufacturer’s deduction. This provision gives all manufacturing, production and extraction companies a 9 percent deduction on their earned income, except oil and gas companies, which are limited to a 6 percent deduction.

During his first term, President Obama and some members of Congress suggested several additional changes that would have added to the oil and gas industry’s tax burden – especially for the five largest U.S. oil companies – although the facts show the industry already pays more than its fair share. According to the American Petroleum Institute, the industry paid an effective tax rate averaging 44.3 percent during the 2006-2011 time period. At the same time, pharmaceuticals had an effective tax rate of 24.2 percent and media companies enjoyed a 23.4 percentage effective tax rate.

Even with this heavy tax burden, the oil and natural gas industry is being credited with shoring up the lackluster U.S. economy. As Karen Harbert of the Institute for 21st Century Energy has observed, oil and gas job growth in the United States has climbed 38.6 percent since 2007. At the same time, nonfarm employment has shrunk by 2.6 percent.

Harbert says “the unemployment rate would be in the double digits were it not for the oil and gas industry.”

By berating the oil and gas industry, the president might win political points with his most ardent supporters, but he risks doing harm to the very people he wants to protect – the middle class. They won’t be helped by adding to the industry’s taxes and raising the cost of producing vital energy supplies. Furthermore, closing so-called loopholes won’t make a dent in the burgeoning budget deficit.

It is time for the president and other populists in Congress to put aside the potentially damaging rhetoric, stop pointing fingers, and lead America to a future of energy and financial security.

Louis D. D’Amico is president and executive director of the Pennsylvania Independent Oil & Gas Association, a nonprofit trade association based in Wexford, Allegheny County.

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