When the Deepwater Horizon drilling platform set off the worst oil spill at sea in American history, it was flying the flag of the Marshall Islands.
Registering there allowed the rig’s owner to significantly reduce its American taxes.
The owner, Transocean, moved its corporate headquarters from Houston to the Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also helped it avoid taxes.
At the same time, BP was reaping sizable tax benefits from leasing the rig.
According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon - a deduction of more than $225,000 a day since the lease began.
With federal officials now considering a new tax on petroleum production to pay for the cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, as well as an increased dependence on foreign oil.
But an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.
According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.
And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits.
These companies’ returns on those investments are often higher after taxes than before.
“The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant,” said Senator Robert Menendez, Democrat of New Jersey,who has worked alongside the Obama administration on a bill that would cut $20 billion in oil industry tax breaks over the next decade.
“There is no reason for these corporations to shortchange the American taxpayer.”
Oil industry officials say that the tax breaks, which average about $4 billion a year according to various government reports, are a bargain for taxpayers.
By helping producers weather market fluctuations and invest in technology, tax incentives are supporting an industry that the officials say provides 9.2 million jobs.
The American Petroleum Institute, an industry advocacy group, argues that even with subsidies, oil producers paid or incurred $280 billion in American income taxes from 2006 to 2008, and pay a higher percentage of their earnings in taxes than most other American corporations.
As oil continues to spread across the Gulf of Mexico, however, the industry is being forced to defend tax breaks that some say are being abused or are outdated.
The Senate Finance Committee on Wednesday announced that it was investigating whether Transocean had exploited tax laws by moving overseas to avoid paying taxes in the United States.
Efforts to curtail the tax breaks are likely to face fierce opposition in Congress;
the oil and natural gas industry has spent $340 million on lobbyists since 2008,
according to the nonpartisan Center for Responsive Politics, which monitors political spending.
Jack N. Gerard, president of the American Petroleum Institute, warns that any cut in subsidies will cost jobs.
“These companies evaluate costs, risks and opportunities across the globe,” he said.
“So if the U.S. makes changes in the tax code that discourage drilling in gulf waters, they will go elsewhere and take their jobs with them.”
But some government watchdog groups say that only the industry’s political muscle is preserving the tax breaks.
An economist for the Treasury Department said in 2009 that a study had found that oil prices and potential profits were so high that eliminating the subsidies would decrease American output by less than half of one percent.
“We’re giving tax breaks to highly profitable companies to do what they would be doing anyway,” said Sima J. Gandhi, a policy analyst at the Center for American Progress, a liberal research organization.
“That’s not an incentive; that’s a giveaway.”
Some of the tax breaks date back nearly a century, when they were intended to encourage exploration in an era of rudimentary technology, when costly investments frequently produced only dry holes.
Because of one lingering provision from the Tariff Act of 1913, many small and midsize oil companies based in the United States can claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights.
Other tax breaks were born of international politics.
In an attempt to deter Soviet influence in the Middle East in the 1950s, the State Department backed a Saudi Arabian accounting maneuver that reclassified the royalties charged by foreign governments to American oil drillers as taxes.
This entitled the companies to subtract those payments from their American tax bills.
Despite repeated attempts to forbid this accounting practice, companies continue to deduct the payments.
The Treasury Department estimates that it will cost $8.2 billion over the next decade,
according to this shocking, but hardly surprising, article in the New York Times.
Over the last 10 years, oil companies have also been aggressive in using foreign tax havens.
Many rigs, like Deepwater Horizon, are registered in Panama or in the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations.
American producers have also aggressively exploited the tax code by opening small offices in low-tax countries.
A recent study by Martin A. Sullivan, an economist for the trade publication Tax Analysts, found that the five oil drilling companies that had undergone these “corporate inversions” had saved themselves a total of $4 billion in taxes since 1999.
Transocean - which has approximately 18,000 employees worldwide, including 1,300 in Houston and about a dozen in Zug, Switzerland - has saved $1.8 billion in taxes since moving overseas in 1999, the study found.
Transocean said it had paid more than $300 million in taxes so far for 2009, and that its move reflected its global scope, with only 15 of its 139 rigs located in the United States.
“Transocean is truly a global company,” it said in a statement.
Despite the public anger at the gulf spill, it is far from certain that Congress will eliminate the tax breaks.
What a surprise.
As recently as 2005, when windfall profits for energy companies prompted
even President George W. Bush - a former Texas oilman himself - to publicly call for an end to incentives, the energy bill he and Congress enacted still included $2.6 billion in oil subsidies.
Hmmmm – a divergence between Bush’s public position on an oil issue, and what his administration actually did ??? Hard to imagine – not.
In 2007, after Democrats took control of Congress, a move to end the tax breaks failed.
Mr. Menendez said he believed the Gulf spill was devastating enough to spur Congress into action.
But one notable omission in his bill shows the vast economic reach of the industry.
While the legislation would cut many incentives over the next decade, it would not touch the tax breaks for oil refineries, many of which have operations and employees in his home state, New Jersey.
Mr. Menendez’s aides said the senator thought it was legitimate to allow refineries to continue claiming a manufacturing tax credit that he wants to eliminate for drillers
because refining is a manufacturing business and because refineries do not benefit from high oil prices.
Mr. Menendez did not consult with New Jersey refineries when writing the bill, his aides said.
Of course not – because he didn’t have to in order to know what they wanted,
and what he was happy to supply them.
David Caploe PhD
Chief Political Economist