Tax Breaks for Big Oil: Understanding the Lower Tax Payments of Large Oil Companies

Large oil companies in the United States pay significantly lower taxes than most other corporations due to provisions in the U.S. tax code that allow them to defer and avoid federal income tax payments. The 2017 Tax Cut and Jobs Act, subsidies, and international tax codes also play a role in shaping the tax landscape for these companies.

Basics

Large oil companies in the United States have been paying taxes at a significantly lower rate than most other corporations. The chief reason is that there are provisions in the U.S. tax code that allow energy companies to defer and avoid federal income tax payments.

Tax Deferments for Big Oil

Oil companies can—and often do—defer federal tax payments. A report published by Taxpayers for Common Sense in 2014 revealed that, from 2009 and 2013, through numerous tax provisions in the 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 paid 11.7% of their pretax income, which is 23.3 percentage points less than required of most other corporations.

Disproportionate Tax Payments

It is estimated that the four largest companies—Exxon Mobil (XOM), ConocoPhillips (COP), Occidental Petroleum (OXY), and Chevron Corporation (CVX)—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 lower percentage, only 3.7% of their total incomes in taxes.

Debt for Tax Deferrals

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. Oil companies can deduct significant portions of their revenues through a tax provision labeled the “depletion allowance."

Impact of 2017 Tax Cuts

The 2017 Tax Cuts and Jobs Acts lowered the tax rate for U.S. corporations, including deferred taxes. The more billions of dollars that had been deferred, the greater the savings from the new law, because the money that would have previously faced a 35% tax rate was now subject to a lower 21% rate.

Subsidies for Big Oil

Large oil companies also receive subsidies in the form of tax credits and exemptions. One example is that oil companies can avoid paying taxes on expenditures associated with intangible drilling costs, a subsidy dating back to 1916, which allows producers to deduct all expenses not directly linked to the final operation of an oil well. These costs can encompass fruitless efforts to drill in new locations, as well as costs associated with new equipment or drilling infrastructure, thereby reducing the amount of taxes to be paid.

International Tax Codes

While oil companies have many tax advantages in the U.S., they face less lenient tax codes internationally. As a result, many oil companies pay income tax to foreign governments, and revenues from income taxes deferred in the U.S. are often used to pay for taxes owed elsewhere.

Public Perception and Government Subsidies

The tax benefits that oil companies receive might give the impression that the American taxpayer is effectively subsidizing a multi-billion dollar industry controlled by a few large organizations. It might imply a sort of nepotism between big corporations and lawmakers.

Economic Considerations

However, others argue that tax breaks for oil companies are warranted because oil is a vital commodity used by a considerable percentage of Americans. The price of oil is an important component of the U.S. economy. Oil spokespeople also argue that getting rid of tax breaks and subsidies would be costly because of reduced oil investments in the private sector and fewer jobs in the industry.

Support for Small Businesses

Some argue that tax provisions are designed to benefit and ensure the survival of a majority of small oil and gas businesses rather than large corporations. It is comparable to the federal government’s provisions for agricultural subsidies, which allow certain crops to be sold at affordable prices and are designed to ensure that farmers are compensated fairly.

Conclusion

Large oil companies in the United States pay lower taxes primarily due to deferral provisions and subsidies in the U.S. tax code. These tax advantages are often justified on the grounds of oil's critical role in the economy and the need to support small businesses in the industry. While the issue of tax benefits for oil companies remains a subject of debate, it is evident that the interplay between tax policy and the energy sector has significant economic and political implications.