1 October 2020

Energy Firms Rewarded With Tax Deferrals

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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 more wells.

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 costs.

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.

Click here to access the full article on The Wall Street Journal. 

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