Since 1913, when the first oil industry-specific loophole was created, the industry has been able to deduct many costs of drilling oil wells immediately, rather than capitalizing the expenses and deducting them over the life of the wells. The industry is allowed to deduct the cost of obtaining raw materials by a fixed percentage each year, regardless of the rate of use of those materials. The Energy Policy Act of 2005 included 10 pages on fossil fuels within the Energy Policy Tax Incentives subtitle, ranging from accelerated natural gas pipeline depreciation to temporary deductions for certain equipment used in refineries.
Gov. Barbour continues: “Is a 44.3 percent effective tax rate fair? Because that’s what oil and gas companies paid on average in federal taxes from 2006-2011.” This is the number the industry – and its lobbyists – use to argue oil companies don’t pay less in taxes. No, in fact, the oil industry has an exorbitant tax burden, they claim. The federal corporate income tax rate is 35 percent before allowable deductions and credits, so we do not believe oil voluntarily pays an additional 9.3 percent in federal taxes.
Though it may be bad business for Gov. Barbour and his lobbying clients, repealing the subsidies to one of the most profitable industries in the world is good business for taxpayers. Last year, the Joint Committee on Taxation analyzed the budget effect of repealing various oil and gas subsidies. They found that repealing the IDC deduction and percentage depletion for oil and gas would produce $9 billion and $12 billion, respectively, over 10 years. In fact, oil and gas industry subsidies are a great place for Congress to start as it searches for solutions to our fiscal problems.
Alexander is president of Taxpayers for Common Sense.