You hear it all the time; especially when gas prices are high. Politicians love to throw out the word “subsidies” when talking about big business (particularly oil and gas) because they know 95% of their audience don’t know what “subsidies” oil and gas companies are actually receiving (SPOILER: they’re not receiving any), and it’s an easy way to demonize big corporations by claiming they are getting lots of free stuff that normal people aren’t getting.
However, contrary to the political spin you often hear, the oil and gas industries do not receive any taxpayer funded subsidies. Yes, the tax code allows them to claim certain tax credits and deductions to encourage continued investment, but none of these tax credits are subsidies that are funded by the people. The oil and gas industry get the same credits as other large corporations like Coca-Cola, General Motors, and Microsoft and every other company you can think of. Even your friendly vegan restaurant owner down the street is getting tax credits. IN FACT, even YOU enjoy tax credits and deductions, like the deduction for mortgage interest payments you claim every April.
But before we go any further, let’s clarify what exactly a subsidy is. When I take a quick look at Dictionary.com, subsidy is defined three ways:
- A direct pecuniary (That’s a fancy word for financial or monetary) aid furnished by a government to a private industrial undertaking, a charity organization, or the like.
- A sum paid, often in accordance with a treaty, by one government to another to secure some service in return.
- A grant or contribution of money.
Interestingly enough, none of those definitions state that a subsidy is defined as not paying a certain amount in taxes. So essentially what politicians are saying is, “We think we should take more money from what oil companies earn compared to what we take from everyone else!” (SPOILER TWO: They already do that)
So, let’s take a closer look at the so-called subsidies oil and gas companies are getting. Here are five examples that make up a bulk of the “subsidies” oil companies are receiving:
Depletion Allowance – This credit is what allows companies to classify reserves in the ground as a capitalized asset, and written off by 15% per year. Here’s the catch they aren’t telling you… The IRS only allows this “subsidy” to be used by independent producers. Larger oil companies such as Exxon and BP aren’t allowed to use this exemption. And it’s not just the comparison to independent producers. Every other industry and company is allowed to depreciate their assets – why not the oil & gas?
Domestic Manufacturing Deduction – This example is a classic case of government logic. In 2004, Congress passed a bill that gave companies tax breaks if they keep their operations in the US. Now, not even 15 years later, the same folks are claiming this as a subsidy from the American people. The first thing to keep in mind is this: the US has one of the highest corporate tax rates in the ENTIRE world. If you don’t think it’s cheaper to run plant somewhere else, your head is in the sand. If tax rates go up, companies will leave. Have you ever done some research on how much cheaper it is to operate a refinery in a different country? You can probably guess the conclusions of that research before you even start. And besides this, domestic manufacturing deductions extend to companies across multiple industries and segments – not just oil and gas. Take it away from one, and you’ll take it away from all.
Foreign Tax Credit – When critics use this as an example of oil and gas subsidies, it’s almost laughable. The IRS allows EVERY company to deduct taxes paid in foreign countries from their profits. So, if every company can do this, why then is this a subsidy for oil and gas companies? It’s not.
Master Limited Partnerships - If you get rid of this “subsidy”, MLP’s would be required to pay taxes before their distributions are passed along to shareholders. That means, any MLP income is taxed at the corporate level and then again at the dividend level. So, what you get is oil companies paying taxes on money they never saw/had, but more importantly it impacts the shareholders. Distributions to shareholders would go down substantially because of double taxation. This hurts the people like you and me that hold these stocks in our portfolios and 401K’s. Needless to say, avoiding double taxation is not a subsidy.
Royalty Payment Reductions on Federal Lands - Some people will argue that paying no royalties on a nominal number of offshore plots or reduced royalties in some regions is a freebie. What they’re not telling you is that oil companies are taxed the same for these operations, just like any other income. I wouldn’t call that a “subsidy”.
The truth is this: Oil companies don’t get subsidies from the government. They get tax credit just like everyone else. Actually, they get less tax credits than everyone else. Most years oil and gas companies are the top thee highest tax paying corporations. The industry as a whole pays an average 45% tax rate. The myth that oil and gas are getting off scott free is exactly that: A MYTH.