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% of profits.

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.

Take the Rich Off Welfare

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