President Obama is intent on cutting the tax breaks that are handed out to the oil and gas majors. He has now made several attempts to pass a law in congress that will remove all tax breaks in the oil sector, and bring in an extra $25 billion in tax revenue over ten years, but each time congress throws out the proposal.
Last year ExxonMobil announced a net income of $41 billion, Chevron a net income of $27 billion, and ConocoPhillips $12.4 billion. They were Americas three largest profit makers, and hugely helped by the high oil prices. Obama has a point when he states that they don’t need the tax breaks, “it’s not like these are companies that can’t stand on their own.”
There are three main points that the president wants to address:
1. That oil companies are able to get credit on their U.S. income tax bills to compensate for the billions in income taxes they pay to oil-rich nations around the world.
2. That oil companies are allowed to deduct from taxable income some of the costs incurred in exploring for oil and drilling the wells.
3. That the oil companies’ receive a domestic manufacturing tax deduction of 6% of the value of oil and gas they produce in the United States.
But on closer inspection of the taxes actually paid by big oil, it may be that congress is correct; the oil companies need these tax breaks (or more the case is that they deserve them).
In 2011 the three oil giants mentioned above paid more income tax than any other American corporation. ExxonMobil paid $27.3 billion in income tax, Chevron paid $17 billion, and ConocoPhillips paid $10.6 billion.
These huge sums gave the companies equally huge effective tax rates. ExxonMobil’s tax rate was 42.9%, Chevron’s was 48.3%, and ConocoPhillips’ was 41.5%. These figures are higher than the US federal statutory rate of 35%, which is the highest tax rate in the developed world.
Income tax does not even represent half of the total taxes paid. Last year Exxon also recorded more than $70 billion in sales taxes and other duties.
Sure, it is unlikely that the public will throw their support behind big oil; in fact a recent survey found that only 9% of respondents thought corporations paid too much in taxes, while 67% thought they paid too little. You are likely to hear more and more protests about the level of tax oil companies are paying from now until Election Day. The group, Citizens for Tax Justice, are complaining that ExxonMobil are only paying tax rates of 13% on its US profits, but this is to compensate for the huge tax bills it faces elsewhere around the world, such as in Angola where it pays 70% income tax. Like every U.S. multinational, Exxon gets tax credits that offset their U.S. tax liability by the amount of tax paid to other countries. Maybe that doesn’t seem fair, but nor is it fair to remove these tax credits from oil companies alone, if the credits are to go, they must go across the board. A move that could see some large companies decide to leave US soil.
Joseph Henchman of the Tax Foundation explains that it all “goes to show that what’s really behind this idea is the desire to extract revenue from a captive company in the belief that higher taxes won’t affect their behavior.”
The argument may still be that the oil companies can afford to pay more tax, but they shouldn’t have to. Yes their net incomes are high, but their revenues are huge. Exxon’s revenues were $486 billion and Chevron’s were $254 billion, which equates to an average net margin of just 10%. Compare that with the $33 billion that Apple earned in 2011 on $128 billion in revenues and Microsoft‘s $23 billion income from $72 billion of sales, giving them margins of 26% and 32% respectively. At the same time Apple only paid an average tax rate of 25%, and Microsoft a positively tiny 16%.
Why do we not hunt these technology giants and demand more tax from them?
By. Charles Kennedy of Oilprice.com