3 Oil and Gas Tax Loopholes and Subsidies You Didn’t Know About

As one of the most mature and profitable industries in the country, it seems impossible that the oil and gas industry pays less in taxes than the standard federal corporate income tax rate of 35%. In fact, according to data from the U.S. Energy Information Administration, the top major oil and gas corporations paid, on average, a federal corporate income tax rate of 25% between 2007 and 2009. This equates to about $4 billion in annual oil and natural gas subsidies. Just recently, the Wall Street Journal reported that the United States has surpassed Russia as the global leader in oil and natural gas production. As companies whose average annual profits are in the tens of billions and are world leaders in the industry, surely they can afford to pay their fair proportion of US corporate income taxes.

This dramatic difference between the standard tax rate and the actual tax rate of the oil and gas industry comes from large federal tax loopholes that the industry has wriggled its way through. Tax credits are meant for emerging industries that need assistance to break into the market; oil and gas has clearly made its claim, yet they continue to profit from Section 199 of the US Tax Code, Foreign Tax Credit, and Oil Depletion Allowance. Renewable energy, an industry that is still finding its bearings, is left with much less financial support than the oil and gas industry.

Section 199 of the US Tax Code

According to Forbes, “American Job Creation Act of 2004” provides 9% deduction from net income for businesses engaged in “qualified production activities.” The production of renewable energy does not qualify for this tax deduction. Oil and gas were limited to 6% deduction; the industry was originally not considered one of the “qualified production activities,” but the industry managed to lobby its way into this loophole. The bill was originally created to provide a competitive advantage to domestic companies engaged in product manufacturing, sales, leasing or licensing, and product-related software activities.

According to ThinkProgress, Section 199 is meant for “companies that produce goods or software or undertake construction projects in the US.” The credit is meant to protect manufacturing jobs in the US since cheap labor overseas is very attractive to many companies. The oil and gas industry is powerful enough that it does not need an incentive to produce in the US; even with this tax break in place, oil and gas companies produce wherever they see fit. Closing just this one tax credit can save the United States $13.2 billion over 10 years. Since American oil and gas are now taking the lead on a global level, it is unlikely that closing this loophole will cause an increase in foreign dependence.

Foreign Tax Credit

As explained by the Center for American Progress, the foreign tax credit allows companies that do business both in the United States and abroad to reduce income taxes paid to other governments from their US tax bill. This rule seems fair, except that it has been significantly weakened recently, allowing oil companies to reap credits on royalty payments as well as on taxes. Effectively, this means that when doing work abroad, oil and gas companies only have to pay taxes to the foreign country, even though they are US companies. They are also rolling royalty payments, fees for the privilege of extracting natural resources, into this tax credit and getting away with paying less to the federal government. Because of this trick, Exxon Mobil paid none of its 2009 income taxes to the United States Treasury. Sure, oil and gas companies are paying for their income and extraction, but none of their billions of dollars are going to the US government, even when its trying to regain its footing from a major recession. Instead, their money is reinvested overseas.

The Foreign Tax Credit cannot be applied to renewable energy because challenges in storing and transporting renewable energy require US renewable companies to produce energy closer to their end consumer. This means that US renewable companies generally only work in the United States, which exempts them from the Foreign Tax Credit.

Oil Depletion Allowance

The Oil Depletion Allowance tax credit essentially allows oil and gas companies to treat oil in the ground as capital equipment rather than a national resource. According to section 179 of the US tax code, the capital equipment tax credit was originally meant to help lower operating costs for companies that are just getting started and have a high startup cost due to expensive mechanical equipment.

At this point, the oil and gas industry is very well established, and does not need help starting up. Furthermore, oil is not mechanical equipment. If this tax loophole applied to solar companies in the same way it does for oil and gas companies, it would be like taking a tax cut for the use of the sun. The oil depletion allowance lets oil companies deduct 15% of profits before paying its income taxes. Eliminating this loophole would save the United States $1 billion per year.

Closing these and other tax loopholes will galvanize the oil and gas industry to pay their freight. The US is struggling to reduce the budget deficit, so properly taxing the most profitable industry in the country will help get us there by saving the US $41 billion over the next decade.

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