Oil Company Taxes

There has been considerable discussion concerning tax breaks for oil companies.

While I am absolutely opposed to raising income taxes, as a percentage of income and other various miscellaneous taxes such as Cap and Trade. and sales taxes, I am convinced that people and corporations should be paying reasonable amounts, without benefit of subsidies, loopholes, dishonesty, and generally devious practices.

The discussion of oil company taxes generally involves a 10-year period. I prefer to look at an annual basis, because our national financial difficulties are now, not 10 years into the future.

Let's look at how oil companies calculate certain aspects of their income tax bill to the IRS.

Domestic Production - After normal calculations of profit, 6% of the profit is subtracted as a deduction for domestic production. Oil production is a worldwide enterprise, and it makes little difference to the American public where that oil comes from, providing it is cheap and consistent in supply. No other industry that I know of, including textiles and various other manufacturing enterprises, have a domestic subsidy production. There is no reason for oil to be an exception. Eliminate the subsidy, which is estimated at $1.2 billion per year.

Foreign Taxes - Individuals and corporations generally are allowed to exclude their payments of foreign taxes when calculating US income tax. This seems reasonable, because individuals and companies should not be penalized for doing business overseas. Oil companies pay about $0.5 billion per year in foreign taxes and this allowance on US income taxes should be continued. There is some complaint that oil companies have in some cases disguised royalty payments as foreign taxes, but to me, it makes no difference. A royalty payment or foreign tax payment to a foreign country is one and the same. It is a cost of doing business.

Drilling Research and Development - Oil companies spend $0.2 billion per year on certain drilling development expenses, which some claim should not be allowed as a deduction in calculating income taxes. However, this is research intended to keep the company competitive by developing new products and techniques. Without such research and development, it is unlikely that BP would have discovered the oil gusher in deep water drilling in the Gulf of Mexico. R&D expense must be continued as a deduction in calculating corporate income tax.

Depletion Allowance - The theory of the oil depletion allowance is that at the time of its inception, there was a finite amount of oil to be discovered in the US and the world. When that supply was exhausted, the oil companies would be out of business. The depletion allowance was an attempt to allow the oil companies to retain a sufficient amount of cash that they could then operate in other areas of energy supply once oil was no longer available. This has basically been found to be a weak or almost false assumption. The fact is that the more oil removed from the "finite" supply, the more seems to be available through new exploration and drilling techniques. The depletion allowance to US oil companies amounts to about $1 billion per year. This deduction in calculating income tax should be eliminated.