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Response to Senator Menendez Regarding “Tax Breaks for Big Oil”

3 min readBy: Scott Hodge

Following my recent testimony before the Senate Finance Committee, I was asked to respond to a number of written questions from Senators that would be placed into the record. The most provocative of these questions, though much more of a statement, was from New Jersey Senator Robert Menendez:

Last week, the major big oil companies announced more than $30 billion in profits. And yet the American taxpayer subsidizes the oil industry with over $3 billion in giveaways each year. Big Oil claims they need these taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. incentives because it helps them keep the price of oil down.

But according to a recent report from Citizens for Tax Justice, Big Oil companies spent most of their profits in the purchase of their own stocks and boosting its dividends. In 2010, four of the largest oil companies allocated only 18 percent of their revenues to exploration but 60 percent on dividends and stock repurchases.

Mr. Hodge, you wrote that “the ideal tax system should do only one thing – raise a sufficient amount of revenues to fund government activities with the least amount of harm to the economy. Given that you support a dramatic simplification of the code and the fact that Big Oil is not using its enormous revenues to actually help lower gas prices, do you believe it would be fair to eliminate these distortions so they can pay their fair share in taxes and help us reduce the deficit?

Here is my response:

The profitability of the industry is irrelevant to the issue of whether or not we should keep or eliminate a tax break. The real issue is whether the tax provision is good tax policy or does it have distortionary and harmful effects on the economy.

I encourage you to read my August 2010 study Putting Corporate Tax ‘Loopholes’ In Perspective. You’ll find that relative to other sectors there are very few tax provisions benefiting the oil industry. For example, while there are roughly $3 billion in tax provisions for the oil industry, there are over $11 billion for renewables and about $13 billion for state and local governments. There are numerous examples of how companies in the renewables industry cannot survive without those tax breaks. That is bad tax policy and those provisions should be eliminated.

Moreover, in my July 2010 study, Oil Industry Taxes: A Cash Cow for Government, you’ll find that according to the Energy Information Administration, that between 1981 and 2008, the direct and indirect taxes paid by the largest oil companies exceeded their corporate profits by 40 percent. I would say that the oil industry is contributing more than its fair share of taxes to all levels of government.

Now to your question about the tax provisions available to the oil and gas industry. As Investor’s Business Daily recently noted in a May 5, 2011 editorial:

The ability to expense intangible drilling costs (enacted in 1916), for example, isn’t any different from the tax breaks other companies get for R&D.

And the “percentage depletion allowance” (enacted in 1926) doesn’t even benefit Big Oil, but independent producers, and isn’t just for the oil industry but all other “extractive industries.”

Eliminating these provisions will do no more to reduce the price of oil than eliminating the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. .