Oil and Gas Subsidies or Sensible Cost Recovery?

August 1, 2014

The oil and gas boom of the past 5 years or so is widely seen as the brightest spot of an otherwise moribund U.S. economy. In fact, a group of economists from Purdue University recently found that without this boom the U.S. economy would still be in recession. Likewise, employment in the oil and gas sector has increased 40 percent since 2008 while overall employment has shrunk slightly.

The driving force is hydraulic fracturing (fracking) and other technologies that have opened up vast new resources throughout the U.S., including the Marcellus Shale in Pennsylvania and West Virginia, the Eagle Ford Shale in Texas, and the Bakken Shale in North Dakota. This is why you can earn $80,000 a year driving a truck in North Dakota, or $25 an hour waiting tables.

However, a new report from Taxpayers for Common Sense seems to suggest it’s all the result of “tax subsidies” that allow oil and gas companies to immediately deduct their investment costs. Titled “Effective Tax Rates of Oil and Gas Companies: Cashing in on Special Treatment”, the report finds that the effective federal corporate tax rate for oil and gas companies is 24 percent on average, “considerably less than the statutory rate of 35 percent, thanks to the convoluted system of tax provisions allowing them to avoid and defer federal income taxes.”

First, there is nothing special about a 24 percent effective tax rate. The average for all corporations is about 22 percent, according to the IRS, so if anything oil and gas companies pay an above average tax rate.

Second, the particular “tax subsidy” the report refers to is intangible drilling costs, which as they explain merely allows companies to immediately deduct, i.e. expense, the costs of drilling. That is not a subsidy, it is the proper treatment of a real and legitimate business cost. The corporate tax is a profit tax, and profit equals revenue minus costs. Labor costs are fully and immediately deductible, so why not other costs?

Taxpayers for Common Sense would prefer these companies delay drilling cost deductions for years and years, because otherwise “these companies are financing significant parts of their business with interest-free loans from U.S. taxpayers.” No, in fact it is the government that is getting interest-free loans from businesses by requiring them to delay deductions for legitimate business costs. Unfortunately, that is normally the case for most investment, because that is the normal depreciation system. The solution is to move towards expensing of all costs, not to remove expensing for this or that industry.

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