Large oil companies in the United States pay taxes at a significantly lower rate than the statutory federal effective tax rate (ETR) of 35% paid by most other large corporations. This is due to provisions in the U.S. tax code that provide subsidies, and allow these companies to defer and avoid federal income tax payments.
Tax Advantages Given to Big Oil
Oil companies are given the ability to defer tax payments to the U.S. federal government. In a report published by Taxpayers for Common Sense in 2014, it was revealed that between 2009 and 2013, through numerous tax provisions in the U.S. 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 ended up paying 11.7% of their pretax income, which is 23.3 percentage points lower than what is required of most other corporations. It is estimated that the bulk of that sum was borne by the four largest companies, ExxonMobil, ConocoPhillips, Occidental and Chevron, which 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 smaller percentage, only 3.7% of their total incomes in taxes.
Tax Deferments for Big Oil
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,” which was passed in 1926.
Subsidies for Big Oil
Large oil companies also receive subsidies in the form of tax credits and exemptions. Oil companies have been able to avoid paying taxes on expenditures associated with the nebulous term “intangible drilling costs” since 1916. Intangible drilling costs can encompass fruitless efforts to drill in new locations, as well as costs associated with new equipment or drilling infrastructure. These are huge sources of capital expenditures.
The Other Side of the Argument
While large oil companies benefit from tax advantages in the U.S., they face less lenient tax codes internationally. Many oil companies pay income tax to foreign governments as well, which do not include the option to defer as a mechanism in their tax codes. Revenues from income taxes deferred are often used by oil companies to pay for income tax owed to foreign governments.
The ways in which big oil companies benefit from federal tax advantages gives the impression the American taxpayer is effectively subsidizing a multibillion dollar industry controlled by a few large organizations, implying a sort of nepotism between big corporations and lawmakers. Some argue in opposition to this point that oil companies are given tax advantages by the federal government because oil is a vital commodity used by a huge percentage of Americans, and the tax provisions are designed to benefit and ensure the survival of a majority of small businesses rather than the large corporations. Proponents of subsidies for big oil make comparisons to the federal government’s provisions for agricultural subsidies, which allow certain crops to be sold at affordable prices and for farmers to be compensated fairly. Oil spokespeople argue that getting rid of tax breaks and subsidies for big oil would cost the government in the form of tax payments and taxpayers in the form of reduced jobs, supplies of oil and investments in the private sector.