The oil industry is under fire from congressional Democrats for reaping big tax breaks even while amassing huge profits. Executives from major oil companies testified Thursday on Capitol Hill.
The oil industry, under fire from congressional Democrats for reaping big tax breaks even while amassing huge profits, responds with a simple argument: Don't pick on us.
Called to testify on Capitol Hill Thursday, executives from major oil companies like Exxon Mobil said eliminating tax-code perks for their drilling activities would amount to unfairly singling them out versus other industries that get tax breaks.
On this issue, the oil execs may have a valid point.
But, whether you agree with those tax breaks or not, the reality is they're part of a corporate tax code filled with special provisions that benefit a broad spectrum of industries.
Consider the finding of a 2008 study by Congress's Government Accountability Office: In 2005, it found, about 1 in 4 large corporations paid no corporate income tax. That's despite an official tax rate that calls for firms to pay 35 percent of their earnings to the federal government.
The reasons (not enumerated in the GAO study) include that many companies had no net profits to be taxed. But tax policies that corporations have lobbied for over the years also played a role in the outcome. Tax credits, overseas tax-shelter strategies, and tax benefits for stock-option awards to executives are among the key factors reducing corporate taxes.
More recently, companies such as General Electric have also been in the news for what critics say are large tax breaks. This week, it's the oil industry's turn.
"If we're going to have welfare for needy corporations," says tax expert Robert McIntyre, the oil industry is "not on the list." But he pushes that logic a step further: Why have tax policies that amount to welfare for corporations, he wonders, especially at a time when the federal government is running gaping deficits?
Arguments for corporate tax reform are being heard more loudly this year from tax specialists who are both liberal (Mr. McIntyre is director of the left-leaning Citizens for Tax Justice) and conservative. Such reform is viewed now as a crucial part of any serious effort to curb federal deficits over the long term.
Some important partisan differences exist.
Republicans typically say tax reform should be done in a way that reduces federal tax revenue from corporations, with the goal of America competing better against other nations as a place for companies to create jobs.
Many Democrats, by contrast, argue that reform can include both simplification – with a lower top tax rate and an enhanced ability for the United States to lure jobs – and more revenue for the federal government.
Either way, talk of streamlining the corporate tax system is rising. If the idea rolls forward, some corporations stand to lose favorite perks, but the idea is also backed by many business leaders as a step to make the US economy more competitive and efficient.
The official corporate tax rate of 35 percent is higher than rates in other advanced economies, because of tax cuts in those nations over the past three decades. But when it comes to the amount of money that companies actually pay in taxes, a 2007 US Treasury study found that American companies pay less in taxes than their counterparts based overseas.
US companies in the period from 2000 to 2005 paid taxes equal to 13.4 percent of their "operating surplus" (one way to measure profits), the study found. In advanced industrial nations overall, taxes totaled 16.1 percent of operating surplus.
The current tax code includes allowances for accelerated depreciation of the cost of investing in things like factories, equipment, or oil wells. But the provisions can vary for different types of assets that companies invest in. That, coupled with industry-specific tax advantages, means that some industries are effectively taxed at lower rates than others.
The oil industry, according to some academic research, pays taxes that are typically higher than in some industries (metal mining) and lower than in many others (restaurants or banks).
The Center on Budget and Policy Priorities, a liberal research group in Washington, argued in a recent analysis that corporate tax reform should move "toward a more even-handed treatment of different kinds of investments" to improve economic efficiency.
"Policymakers may still want to favor certain activities, such as research and development, that produce benefits beyond those that the individual firm will realize itself," the center recommended.
But determining when an exception is warranted and when it's just corporate welfare isn't easy.
In testimony presented to the Senate Finance Committee on Thursday, Exxon Mobil chief executive Rex Tillerson said that one large tax break – which the Obama adminstration wants to eliminate for the oil giants – is available to a wide range of industries as an incentive for job creation.
"Tax provisions such as the Section 199 Domestic Production Activities Deduction are not special incentives ... for oil and gas," Mr. Tillerson said, "but rather standard deductions applied across all businesses."
Although that's true, it's also the case that some industries like oil benefit a lot more than others from these deductions, McIntyre says.