Oil and Gas Companies Shirk Tax Responsibility

Break out the streamers and the party hats—it’s Tax Day! Of course the overachievers filed their taxes months ago, but no doubt a few folks are frantically sifting through piles of paper at this very moment trying to locate that wayward W-2.

Either way, every year millions of Americans file their taxes and pay their fair share to keep our country running. But for many companies, including those in the oil and gas industries, ducking the taxman has become par for the course.

From avoiding state severance taxes (more on that in a minute) to reaping the benefits of an industry-friendly federal tax code, America’s oil and gas industry benefits from subsidies that increase the federal debt. These tax breaks help make oil and gas artificially “cheap” energy sources, while you and I foot the bill for the industries’ pollution.

For example, after fouling the Gulf of Mexico and harming the region’s ecosystem during the Deepwater Horizon oil spill, BP will receive a massive tax deduction that saves the company $9.9 billion this year. The federal tax code allows the company to deduct up to 35 percent of its losses, including those incurred during the oil spill. The Washington Post reports that “taxpayers will indirectly foot part of the bill for the $20 billion fund that BP established to compensate people and businesses harmed by the disaster.”

Hold on, we’re just getting started.

All major oil and gas producing states, except for Pennsylvania, receive severance tax revenue: companies pay taxes on profits earned from severing a state’s mineral wealth from its land. The lack of a severance tax in Pennsylvania has become big news of late, as the state is simultaneously experiencing a natural gas drilling boom and a budget shortfall. Drilling in the Marcellus Shale, a rock formation with natural gas reserves located beneath several Eastern states, is increasing in Pennsylvania, where more than 1,600 wells currently operate. Proponents argue that severance tax revenue could boost state coffers and avoid major budget cuts to higher education and hospitals. At least one Pennsylvania lawmaker has proposed a two percent severance tax on gas drilling, but the proposal lacks the support of Governor Tom Corbett (R) and members of the state legislature.

The natural gas industry also gets a break on taxes in Texas. The Texas legislature amended its severance tax in 1989 to temporarily exempt “high-cost” gas and oil drilling. According to the Houston Chronicle, Texas Republicans made the change permanent in a sneaky procedural move, resulting in the permanent loss of $1.2 billion of annual tax revenue. In 1990, only 5.5 percent of gas and oil production in Texas was classified as “high-cost.” But by 2009, the Texas Railroad Commission had applied the “high-cost” designation to entire regions of the state, no matter what the actual drilling costs were, exempting 56 percent of production from the severance tax.

The federal tax code is likewise peppered with breaks and loopholes for the oil and gas industries. For example, gas drilling firms can choose to expense or deduct what are dubbed “intangible drilling costs” (IDC). How would you define “intangible”? The U.S. tax code says intangible costs include “all expenditures made for wages, fuel, repairs, hauling, and other various supplies necessary for the drilling of wells and the preparation of wells for the production of oil and gas.” The Congressional Research Service notes that eliminating the IDC deduction would generate $5.6 billion in federal revenue between 2011 and 2015.

The Congressional Research Service also reports that once an oil field has been pumped dry, the land loses its value. That just sounds like common sense, but according to the federal tax code, this depreciation in land value is worthy of another deduction.

The list of special exemptions, deductions, and credits goes on and on. In total, the Congressional Research Service estimated that between 2000 and 2009, the federal government gave away $19.2 billion in tax breaks to the oil and gas industries.

These myriad tax breaks to the oil and gas industries are especially vexing considering the budget-cutting fever sweeping through Congress. Legislators are suddenly obsessed with reducing spending, recently pushing through $39 billion in cuts to the federal budget, including slashing the Environmental Protection Agency’s budget by $1.6 billion, a 16 percent decrease. Congress tells us that funding for everything from health care and food programs for women and children to National Public Radio must be cut, but at the same time the federal government gives away billions in tax incentives to industries that are reaping record-setting profits.

Further compounding the ridiculous nature of the tax breaks are the threats to human and ecological health associated with drilling for oil and gas. It isn’t fair or right that industries receiving billions of dollars of annual tax breaks should be allowed to contaminate peoples’ drinking water and spew toxic air pollutants. We pay for that contamination in higher health care costs. But just as Congress has aided industry through tax policy, so it has helped industry to avoid complying with environmental laws that protect you and me.

You can do something to make this situation better. The oil and gas industry may continue to benefit from a lax tax code, but at least we can make it pay for the pollution controls that protect our air, our water, and our health. Help Earthjustice tell Congress to close oil and gas industry loopholes in the Safe Drinking Water Act and to require disclosure of chemicals used during hydraulic fracturing, or “fracking.” (And for more on fracking, check out our brand-new campaign page.)