Congress, especially this Congress, can make even simple tasks look difficult, but by all accounts reforming the federal tax code is not an easy thing to do. Tax reform has been on everyone’s lips since the chairmen of the tax-writing committees in the House and Senate both took the unusual step of releasing comprehensive reform proposals. It has been almost 30 years since the last overhaul of the tax code, and just about everyone agrees it is time for another pruning. While calling for lower rates from reform, industries are lining up to protect their pet provisions.
This week, we released our analysis of the effective tax rates of some of the largest oil and gas companies based in the U.S. The oil and gas industry has been a critic of tax reform, probably because the proposals from Chairmen David Camp (R-MI) and Max Baucus (D-MT) (then Chair of the Senate Finance Committee), the White House, and independent commissions have all taken aim at their special tax breaks. Reviewing their financial records we found that 20 of the largest oil and gas companies reported an effective federal tax rate of 24 percent from 2009 through 2013, well below the statutory corporate rate of 35 percent.
The oil and gas industry is special because the tax policies that single them out, like the deduction for intangible drilling costs (IDC), survived the last overhaul of the tax code in 1986 under President Reagan. That provision has been in the tax code since 1916, a few short years after the income tax was introduced. Today, deductions like the IDC only help huge oil and gas companies push their already favorable tax rates even lower. One of the biggest tax benefits for oil and gas companies is the ability to defer the payment of their taxes. The amount the 20 companies in our study actually paid to the federal government during the last five years, excluding the amount they were able to defer, was equal to 11.7 percent of their U.S. pre-tax income. What small businesses wouldn’t be psyched to pay a federal income tax rate of less than 12 percent?
Special provisions targeting the industry like the IDC deduction, which can’t realistically be taken by other industries, allow “independent” oil and gas companies (those that concentrate only on exploration and drilling, not refining or marketing) like ConocoPhillips to immediately deduct from its taxable income all of its costs for building an oil rig. Deducting all of its costs up front – instead of waiting for the asset to generate income and then expensing these costs over 5, 10, or 20 years, like other taxpayers – allows ConocoPhillips to shelter more of its current income from federal taxation, deferring the payment of taxes until later. While the taxes should technically be paid over time, we found the total amount of deferred taxes for these 20 companies steadily increased over the last five years.
By the end of 2013, the 20 companies we studied had accumulated $175.8 billion in total deferred tax liabilities. These are taxes the companies would have already paid the federal government were it not for the special treatment they receive in the tax code allowing them to defer payment. No interest accrues on the amount they owe, and it could take a decade or more to eventually pay it all, depending on how much income they report in the future.
So, it’s not hard to see why these companies oppose real tax reform. We don’t mean to pick on oil and gas companies, they just get some hefty nice tax breaks that cost Uncle Sam a lot in foregone revenue, which could be used to offset the cost of overhauling the entire corporate tax code. They also happen to be one of the most profitable industries in the world, so they can probably do without preferential treatment written into the code a century ago. But, to be fair, there are lots of other wasteful tax policies that should be nixed as well. We’ll have more to say on those soon. Stay tuned.