Tax Breaks for Major Oil and Gas Companies

With oil and gas companies spending billions of dollars on hydraulic fracturing the country’s shale formations, they are discovering the advantages of deferring their taxes year after year. Within the U.S. tax code are incentives that provide for drilling investors a way to put off paying taxes, as long they continue to invest, allowing for a massive safety net while they keep drilling.

When combining twenty of the top oil and gas companies in the country, they collectively paid $15.6 billion, and they collectively deferred $16.5 billion over the past five years. Their effective tax rate was only 24%, which is lower than the regular domestic rate of 35% and the abroad rate of 46.2%. The break in the tax codes allowed for a 78% increase in capital expenditures since 2009, giving industry officials a positive outlook on the circumstances.

The positives of high spending include job creation, a decrease in energy prices, and a reduction in the dependency on foreign imports. Drilling companies can take bigger risks in investing in new sites, usually an expensive endeavor, by using the tax break money for everything from searching for drilling sites to constructing the site itself.

Congress created “bonus depreciation” to reward big oil businesses for their continued success in improving the economy by producing more of perhaps the most important domestic good that we have. Yet other major industries, like telecoms and railroads, are also feeling the benefits of the tax break.

Of course, when it comes to tax incentives, there are always those who feel the need to push the envelope. Occidental Petroleum in Houston deferred $4.5 billion, more than anyone else in the top twenty, while Pioneer Natural Resources deferred nearly everything they owed to the government.

Source: The Wall Street Journal, “U.S. Energy Firms Rewarded With Tax Deferrals,” Daniel Gilbert, July 31, 2014