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Breaking It Down: Oil-Industry Tax Breaks Breaking It Down: Oil-Industry Tax Breaks

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ENERGY

Breaking It Down: Oil-Industry Tax Breaks

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A support ship related to the collection of oil from over the site of the BP Deepwater Horizon oil well transitions through a sheen of oil as workers try to stem the flow of the oil spill in the Gulf of Mexico off the coast of Louisiana, June 12, 2010. AFP PHOTO / Saul LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)(SAUL LOEB/AFP/Getty Images)

Oil companies save $4.4 billion every year through the industry’s tax breaks, according to an Associated Press report.

As motorists are paying nearly an average of $4 ($3.98) per gallon for self-service, unleaded regular gasoline, many find it alarming to see the oil industry bringing home about $200 billion in pretax profits this year.

 

The result? The Obama administration and Democrats in both chambers of Congress are once again calling to eliminate these tax breaks and put the money toward the national debt and perhaps clean-energy alternatives.

At the same time, oil executives and industry advocates, who are testifing in front of the Senate Finance Committee this morning, say doing so would be counterproductive.

According to data compiled by Compustat, industry says the 41 U.S. oil and gas companies put $5.7 billion toward taxes in 2010.

 

Companies say cutting into funds used for business expenses would raise gas prices ansd harm the economy.

But making these arguments could prove difficult when lawmakers are concerned about the deficit and high gas prices.

Here’s the breakdown of some of the industry's tax breaks:

Domestic Manufacturing

 

The Section 199 domestic manufacturing deduction is most targeted of the tax breaks for the five biggest oil companies. Eliminating it is a part of the proposal by Senate Finance Chairman Max Baucus, D-Mont., as well as the one by House Democrats called the Taxpayer and Gas Price Relief Act. House Democrats also brought the deduction up during a floor debate of a bill to expand offshore drilling last week, trying to force a vote on repealing it for the big five. The motion was tabled.

Available to almost every kind of company, this deduction allows for up to 9 percent of profits from domestic manufacturing to be deducted. Even though the oil and gas industry is limited to a 6 percent deduction, it is considered to be “most egregious” by Democrats, as the industry is expected to save $18.2 billion over the next 10 years, according to the AP report.

Foreign Tax Credit

This is another deduction facing scrutiny from lawmakers. Baucus’s blueprint in the Senate proposes reducing this tax credit. Though oil companies cannot deduct the royalties that they pay foreign governments for drilling from their U.S. taxes, the industry can often claim the royalties as foreign taxes in order to deduct them. While the administration and Democratic lawmakers see this as a loophole, the American Petroleum Institute says that repealing this would “impose a double taxation on U.S.-based companies.” Whitney Stanco, an analyst at MF Global, told the AP that removing this benefit could cost the industry $8.5 billion over 10 years.

Intangible Drilling Costs

This allows for the deduction of costs associated with drilling, such as those for labor and exploration. API says that this deduction is “no different than the policy behind and treatment of R&D costs for other industries” and notes that while small, independent companies (not targeted by the Senate legislation) can deduct all of these expenses in the first year, bigger, integrated companies can deduct only 70 percent in the first year. This deduction is worth $12.5 billion over the next 10 years, according to the AP report.

Percentage Depletion

Although this deduction was eliminated for bigger oil companies in 1975, independent producers can still take advantage. This depletion deduction allows drillers to deduct 15 percent of a well's revenue from its taxable income per year in order to depreciate the value of their wells. Industry advocates point out that this provision is available to all extractive industries (gold, iron, clay, etc). This tax break is worth $11 billion over 10 years, according to the report.

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