Is the Oil Industry Really Getting a Sweet Deal on Taxes? - US News and World Report

Is the Oil Industry Really Getting a Sweet Deal on Taxes? - US News and World Report

Is the Oil Industry Really Getting a Sweet Deal on Taxes?

Data shows that despite the breaks Big Oil gets, the industry still pays some of the highest taxes

By Meg Handley

April 24, 2013 RSS Feed Print

Debate continues on Capitol Hill over if Big Oil should continue reaping the benefits of billions of dollars in tax incentives all while reporting billions in profits.

With average fuel prices still more than $3.50 a gallon across the nation, oil and gas giants such as Exxon and Shell are often vilified for gouging customers at the pump while their company coffers swell with profits.
As first quarter company earnings trickle out this week and next, that chorus of criticism is only likely to get louder, especially as debate continues to brew on Capitol Hill over whether Big Oil should continue reaping the benefits of billions of dollars in tax incentives all while reporting billions of dollars in profits.
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"At a time when oil companies are making more money than ever before, how can we justify giving them billions more in taxpayer subsidies every year?" Obama energy and environment adviser Heather Zichal wrote in a recent post. "And if Congress doesn't vote to eliminate these tax breaks now, then when? How much bigger do oil company profits need to be?"
But the Big Oil is punching back in a new report from industry trade group American Petroleum Institute, arguing that the oil and gas industries already contribute more than their fair share when it comes to taxes and reap pretty average returns compared with other sectors.
Between 2007 and 2012, the oil and gas industry paid an effective tax rate of almost 45 percent according to the API report, compared to the healthcare industry, which paid about 35 percent and pharmaceuticals, which paid around 21 percent. Why the big discrepancy? Oil and gas companies have to go where the oil and gas are, which is sometimes overseas, subjecting U.S.-based firms to higher taxes on overseas income. In addition, oil companies pay state and local taxes.
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Indeed, of the top 10 companies paying the highest income taxes in 2012, oil industry companies took the first two slots, according to rankings by USA Today. ExxonMobil was number one, paying more than $31 billion in income taxes last year followed by Chevron, which paid $20 billion. Computer hardware company Apple came in third, paying about $14.2 billion in income tax.
"The oil and gas sector is a heavily-taxed sector, and what critics call 'tax loopholes' available to the oil and gas industry are available to all other manufacturing and mining [companies]," says Bernard L. Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University.
While the industry's tax bill might be monstrous, its profit margins aren't, according to API, at least compared to other industries. Oil and natural gas companies posted a 7.3 percent profit margin as a group, according to data from Standard & Poor's Research Insight. That's compared to 8.6 percent for the manufacturing sector, 16 percent for pharmaceuticals and a whopping 19.3 percent for beverage and tobacco companies.
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Those figures translate to relatively unexceptional earnings overall according to experts, especially given the size of the industry as a whole and the high cost associated with energy exploration and production. Over the past five years, average net income in the oil and gas industry has averaged about 8 cents for every dollar of sales according to S&P, roughly in line with U.S. Census data for the broader manufacturing sector. More recently, that's fallen to about 5.5 cents on the dollar compared to 7.7 cents on the dollar for manufacturing.

"The common perception is that the oil and gas industry earns unreasonably high profits, but that comes from the nominal numbers," Weinstein says. "There are huge costs associated with energy exploration and production, so it's not appropriate to look at profitability in gross terms."
But despite the disparities in tax rates and profit margins highlighted by the API report, aggregate numbers comparing industries aren't terribly meaningful according to Clint Stretch, senior tax policy counsel at premier tax publisher Tax Analyst. According to Stretch, the diversity of companies operating in the oil and gas space makes it difficult to make accurate sweeping statements about the entire industry. It's just not apples to apples.
"It'd be like looking at your kid's high school and saying all the kids have IQs of 110," Stretch says. "The average might be 110, but there are going to be some kids with 120 IQs and some kids with 100 IQs."