We announced our second quarter earnings yesterday, and afterward I talked with some reporters not only about our financial performance, but also about some of the key policy issues affecting our industry. The main item of discussion concerned current tax proposals that could be seriously damaging both to the U.S. oil and gas industry and the economy in general.
At a time of historic economic weakness in this country, I indicated I was concerned by Administration proposals to impose new punitive taxes on one of the few industries that has been contributing to the U.S. economy rather than receiving a bail-out. Unfortunately, instead of supporting an industry that is an engine of growth in this country, there is a push for $80 billion in new taxes on the industry.
I gave reporters two examples of efforts to change parts of the tax code that some in Congress and the Administration consider “subsidies.” The first is a proposal to repeal section 199 of the Internal Revenue Code, which is a deduction designed to help all industries create jobs in the U.S. The repeal, however, would apply only to the oil and natural gas industry. I’ve talked about it in a previous blog post criticizing the New York Times’ support for this repeal.
The other example involves efforts to effectively eliminate the foreign tax credit – resulting in double taxation of earnings outside the United States. Here are the details I shared:
- Currently, the foreign tax credit enables all U.S. companies to operate and produce goods and services in other countries without taxing profits twice—once by the host country and once again by the home country. This allows U.S. companies to have a level playing field among foreign competitors.
- The changes the Administration proposes would force U.S. oil and gas companies to pay a double tax on income from our foreign operations by eliminating this credit – and therefore creating a huge competitive disadvantage.
- Oil and gas companies from Europe (BP, Shell, Total, etc.) and elsewhere would continue to incur only one level of taxation in almost all cases, while their American counterparts would have to pay twice.
- A look at some large American oil and gas companies shows that while almost 80 percent of our 2009 net profits are from foreign sources, almost 50 percent of our workforce is in the U.S. Many of these U.S. jobs will be at risk if the companies were to lose market share to foreign competitors.
Some are trying to push through these changes under the preconceived notion that oil and gas companies don’t pay their fair share. Nothing could be further from the truth. In fact, the industry’s 2008 income tax expenses averaged 53.2 percent, compared to 32.2 percent for the S&P Industrial companies. ExxonMobil alone paid $63 billion in taxes over the past five years, an amount that exceeded our U.S. earnings during that time by $19 billion.
You can read more about industry taxes on the American Petroleum Institute’s website, but I’d also like to hear what you have to say about taxing “big oil.”
Mr. Cohen,
Great article! But should be printed in the WSJ, forget the NYT, a waste of paper. Glad to see XOM taking a stand against this adolescent run government and getting the truth out there. This government is the only institution that can take more “profit” than the stock holders with absolutely no investment or risk.
Mr. Cohen
I appreciate this post. However, it would be useful if, when you refer to pending legislation, you could specify the title of the legislation and perhaps the names of the congressmen formally proposing it.
thanks again,
j
Jim, the changes to the tax code I discussed are being proposed as part of the Administration’s fiscal year 2011 budget. Since I last posted on this, the House has taken further steps to impose new taxes on our industry by passing additional energy legislation last Friday. Referred to as “conservation fees,” the bill includes $22 billion in new taxes on U.S. oil and natural gas production.
Here are the links:
Fiscal year 2011 budget: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/budget.pdf
House energy bill: http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR3534:/
News article on the House energy bill: http://www.google.com/hostednews/ap/article/ALeqM5jzgs5RUnejbtYuUEigNXhGzYATgAD9H9M53G1
Let us not forget that the oil is a resource, that is NON RENEWABLE, and is given to the corporations for paying a license to drill, granted by “The People”. So they are making a profit off of “The People’s” oil. It is not there’s they did not manufacture the oil, so they should be happy with the $44BB they made, more than the entire middle class for that time. Why should you be mad about “OUR” government making money, it belongs to “US”. Yes the tax may seem unfair at first look, but if you dig deeper you will see that they will force companies like XOM to follow the path of RENEWABLES! These renewable energy sources are not taxed heavily and come with credits and subsidies. And best of all they are sustainable, good for the environment that we leave to our grandchildren and theirs and so on…, Plus we can grow these domestically and bring the money home to the good old USA! Securing our energy independence and freeing us from this war over oil! IF the energy companies make the energy here, no double tax, sounds good to me, but I don’t own XOM stock….
Another thought on industry taxation:
It would be interesting to see the oil/gas industry’s stock compensation expenses and/or taxes paid on stock based compensation. It seems to me that it’s possible that $billions of stock based compensation costs are going untaxed in tech startups, although I don’t have the skills (or possibly the gumption) to ferret this information out of financial statements and tax law.
Here are the tax advantages to producing domestically, the government isn’t ALL evil:
Congressional Incentives Encourage Domestic Petroleum Development
Oil and Natural gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not “Loop Holes” — they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments.
Intangible Drilling Cost Tax Deduction
The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually about (65 to 80%) of the cost of a well. These expenditures are considered “Intangible Drilling Cost (IDC)”, which is 100% deductible during the first year. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (See Section 263… read more »
…of the Tax Code.)
Tangible Drilling Cost Tax Deduction
The total amount of the investment allocated to the equipment “Tangible Drilling Costs (TDC)” is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period. (See Section 263 of the Tax Code.)
Active vs. Passive Income
The Tax Reform Act of 1986 introduced into the Tax Code the concepts of “Passive” income and “Active” income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a “Passive” Activity, therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. (See Section 469(c)(3) of the Tax Code).
Small Producers Tax Exemption
The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the “Percentage Depletion Allowance”, is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day. It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The “Small Producers Exemption” allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free.
Lease Costs
Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and Lease Operating Costs (LOC) are also 100% tax deductible through cost depletion.
Alternative Minimum Tax
Prior to the 1992 Tax Act, working interest participants in oil and gas ventures were subject to the normal Alternative Minimum Tax to the extent that this tax exceeded their regular tax. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item. “Alternative Minimum Taxable Income” generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. “Tax preference items” are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the wells thereon.
Tax Bill Gives Incentive to Marginal Wells
The US Senate and House of Representative have passed a tax incentive bill to help small oil and gas producers. This bill provides a tax credit of up to $9 per well per day for marginal wells. A typical marginal well pumps 15 barrels of crude or 90 thousand cubic feet of gas per day. There are 650,000 “marginal” or “stripper” oil and gas wells in the USA. Marginal wells provide as much as 25 percent of the nations’ crude supply (on par with Saudi Arabia ) and about 10 percent of gas stocks. In 2002 alone, 17000 oil and gas wells were permanently plugged with cement (13,600 oil wells and 3,900 gas wells). This tax bill will act as a safety net to save many of these wells, thereby reducing our reliance on the Middle East. The tax credit phases-in if the average crude price for a year is less than $18 a barrel or $2 per thousand cubic feet of gas. The maximum tax credit is $3 a barrel for the first three barrels of crude produced if prices plunge below $15 a barrel, and 50 cents per thousand cubic feet if gas prices average less than $1.67 per thousand cubic feet.
Tax Codes Applicable to Gas and Oil
But you heard the man.. this tax increase will COST American jobs. It seems he has no intention of drilling in America
I suggest a tax credit for every new American job you create to offset the double taxation penalty, and a credit for contributions to an oil industry accident fund. By the way, what IS the estimated penalty?? I wonder why you decided to omit that key number? How big a problem is it?
You asked how big a problem this is for the industry. The fact is the proposed changes would have a huge impact on the U.S. oil and gas industry’s ability to compete overseas. If these changes go into effect, tax rates for U.S. companies could increase by as much as 50%. That would put American companies at a major disadvantage compared to non-U.S. competitors. I am mystified as to why any American policymaker would consider such an outcome to be acceptable.