Oil and Gas Tax Breaks:
$2.4 billion a year
excerpted from the book
Take the Rich Off Welfare
by Mark Zepezauer and Arthur Naiman
Odonian Press, 1996
Oil and Gas Tax Breaks: $2.4 billion a year
Like the percentage depletion allowance just described, the
oil depletion allowance lets certain companies deduct 15% of the
gross income they derive from oil and gas wells from their taxable
incomes, and continue to do that for as long as those wells are
still producing. Some smaller companies get to increase the deduction
by 1% for every dollar the price of oil falls below $20 a barrel.
This tax break, on which we lose about $1 billion a year,
can add up to many times the cost of the original exploration
and drilling. In fact, it formerly could amount to 100% of the
company's profits-in which case the company paid no taxes, no
matter how much money it made. Presently this is capped at 65%
The rationale for this loophole is that it encourages exploration
for new oil-presumably something no oil company would otherwise
do. Oil industry executives argue that other businesses are allowed
to depreciate the costs of their manufacturing investments. That's
true, but they're only allowed to take off the actual cost of
those assets, not deduct 15% of their gross income virtually forever.
Introduced in 1926, the oil depletion allowance was restricted
in 1975 to independent oil companies that don't refine or import
oil. To make up for this, the larger, integrated companies were
given the intangible drilling cost deduction, which in some ways
is even better.
It lets them deduct 70% of the cost of setting up a drilling
operation in the year those expenses occur, rather than having
to depreciate them over the expected life of the well. The other
30% they can take off over the next five years. This boondoggle
costs us about $500 million a year.
A third tax break is the enhanced oil recovery credit. It
encourages oil companies to go after reserves that are more expensive
to extract-like those that have nearly been depleted, or that
contain especially thick crude oil. The net effect of this credit,
which costs us $500 million a year, is that we pay almost twice
as much for gasoline made from domestic oil as we do for gas made
from foreign oil.
Together, these three loopholes sometimes exceed 100% of the
value of the energy produced by that oil. In other words, it would
be cheaper in some cases for the government to just buy gasoline
from the companies and give it to taxpayers free of charge.
(Of course, without the tax breaks, the oil companies would
charge more for gasoline, bringing our prices closer to other
countries'. This would undoubtedly lower our per capita consumption
of gasoline, which is currently the highest in the world.)
There's a fourth tax break we can't count because we can't
estimate its size; for details on it, see the section on "master
limited partnerships" in the chapter called What we've left
out. But miscellaneous smaller tax breaks and subsidies add an
additional $400 million a year to the oil industry's wealthfare,
which brings the total to $2.4 billion.
Instead of throwing $2.4 billion a year at the oil companies,
we could encourage them to cut down on waste during production
and transport. Each year, the equivalent of a thousand Exxon Valdez
spills is lost due to inefficient refining, leaking wells and
storage tanks, spills at oil fields and from tankers and pipelines,
evaporative losses, un-recycled motor oil and the like.
The current oil and gas tax breaks encourage the use of fossil
fuels at the expense of cleaner alternatives, reward drilling
in environmentally sensitive areas like wetlands and estuaries,
and artificially attract to the oil industry investment money
that could be used more productively in other areas of the economy.
the Rich Off Welfare