The U.S. energy boom is producing a little-noticed side
effect: American oil and gas companies are paying less in federal income taxes.
Energy companies are spending billions of dollars a year to drill in shale
formations across the country, sending the nation's daily oil output up by
almost 50% in just the past few years. Techniques like hydraulic fracturing and
horizontal drilling, which make it possible to tap petroleum in these new
fields, make each well cost millions of dollars.
All that spending has allowed drillers to take advantage of
incentives in the tax code for drilling and capital expenditures, deferring
billions of dollars in income tax. Ultimately, companies will have to pay some
or all of the taxes. In the meantime, they can use the extra cash flow to drill
According to the nonpartisan Taxpayers for Common Sense, 20
big publicly traded U.S. oil and gas producers paid a combined $15.6 billion in
U.S. income tax, or 11.7% of their American earnings, and deferred $16.5
billion. Together, the 20 had an effective tax rate of 24% on their U.S.
income, below the statutory 35% rate and well below the 46.2% those with
overseas operations paid abroad. Those deferred taxes reflect big increases in
capital spending. In 2013 alone, the 30 biggest U.S. oil and gas producers by
revenue shelled out $186.9 billion in capital expenditures.
Energy industry officials say that the trend of companies
deferring tax payments is good for the economy, as higher corporate spending
creates jobs and other tax revenue. And the wave of spending on U.S. drilling
has fed an oil and gas boom and delivered broad economic benefits, driving down
energy prices and lessening the country's reliance on imports.
One tax incentive, which has existed for about a century,
allows companies to deduct "intangible drilling costs," the money
they spend preparing to drill a well, from analyzing geology to building a
road. The benefit is designed to encourage drilling, often a risky and
expensive endeavor, by allowing companies to quickly recover much of their
By taking a big deduction in one year, rather than smaller
ones over many years, firms can lower their immediate tax bills but lose those
future offsets against future income, which is why they are said to be
deferring their taxes. But if they continue to spend heavily, they can continue
to defer taxes for years.
A temporary tax break, known as "bonus
depreciation," was enacted by Congress in 2008 as part of the economic
stimulus package. It has allowed companies in many industries to write off
between half and 100% of investments they make in equipment and infrastructure
in the year they spend the money, instead of deducting smaller amounts over
years under regular depreciation schedules.
Houston-based Occidental Petroleum Corp. OXY +1.70% has
deferred the most U.S. income tax over the past five years among its peers. The
company has deferred paying $4.5 billion in federal income taxes over the past
five years—six times as much as what it paid the government. Occidental's $9
billion capital spending last year, along with its $7 billion income tax
liability, have both nearly tripled since 2009. It pays far less income tax per
barrel of oil in the U.S. than any of the regions where it operates globally,
from Latin America to the Middle East.
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