“Busting the Myths of Oil and Gas Taxation”

1. “Busting the Myths of Oil and Gas Taxation” Scott Hodge President 202-464-6200 www.TaxFoundation.org 1

3. Obama’s Pledge “We need to get behind this innovation. And to help pay for it, I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. (Applause.) I don't know if — I don't know if you've noticed, but they're doing just fine on their own. (Laughter.) So instead of subsidizing yesterday's energy, let's invest in tomorrow's.” -- State of the Union Address, January 25, 2011

4. “Close Tax Loopholes Act” (S. 940) • Deny FTC for “dual capacity” taxpayers • Deny Domestic Manufacturing Deduction (“199 Deduction”) • Deny deduction for intangible drilling and development costs • Deny percentage depletion allowance for oil and gas wells • Deny deduction for tertiary injection expenses

5. Basic Flaws When you tax something you get less of it – see tobacco Violate many basic principles of sound tax policy. Sets bad precedent of using tax code as political weapon

6. Two Myths Myth 1: Oil Industry does not pay its “fair share” of taxes Myth 2: Oil industry benefits from billions of dollars in tax benefits

10. Tax Rates Paid by “Big Oil” in Other Countries

11. Bad Tax Policy Warning #1 Denying foreign tax credits violates basic principle against double taxation All tax systems should protect against double taxation – and most do U.S. companies would pay 78% to Norway then again pay 35% U.S. rate

12. Major Categories of Tax Expenditures FY 2011

13. Budgetary Cost of Corporate Tax Expenditures Total $653 Billion between 2012 - 2016

14. Renewables Get Twice the Tax Benefits of Other Energy Sources

15. Domestic Manufacturing Activities Deduction – “Section 199” Cuts effective rate from 35% to 32% -- except for oil companies (33%) Available to all domestic manufacturers – C-corps, S-corps, farmers, individuals Qualified activities include the manufacture, production, growth, or extraction of: clothing, goods, food, software, music recordings, movies, electricity, roads, power lines, autos, toys, etc. for retail consumption only.

16. Bad Tax Policy Warning #2 Tax policy should not be used to punish one activity over another – arbitrary If deny 199 for oil companies, then why keep it for automakers, asphalt layers, tire & toy makers, synthetic clothing, etc.? Why stop at “big oil.” Next for targeting: sugary drinks, fatty foods, alcoholic beverages, guns, political target de jure.

17. Image Problem IDCs, Tertiary, Percentage over cost depletion all identified as “tax expenditures” by JCT & Treasury Perception that tax benefit exceeds costs How do you get out of the spotlight? Can you fold these into broader policies – R&D or depreciation? Are you willing to give up for a lower corporate rate?

18. Bad Tax Policy Warning #3 If this rhetoric succeeds… Leads to… Fewer independents Less domestic production, exploration, drilling Increased dependence on foreign oil. Higher prices at the margin …it means… • A tax on independents • Higher taxes on domestic production, exploration, and drilling

19. Take Aways Oil industry pays more than its share of taxes. Governments “profits” no matter what the price of oil. Tax preferences for business are smaller than what people think – preferences for oil and gas are an even smaller fraction. More tax loopholes for solar, wind, ethanol and switchgrass than oil and gas. Any closing of loopholes should be done within the context of fundamental tax reform. When you tax something, you get less of it. Why do we want less domestic production of oil?