Tax Burden of the Oil and Gas Industry
Authors: Peck J. Lane 
Published: December 2007

This paper describes the existing tax climate, summarizes the industry's favorable treatment under the federal income tax law, discusses current federal income tax problems, notes the magnitude of state and local taxes and problems, notes the magnitude of state and local taxes and attempts to predict future tax developments. (Those who are interested in a detailed explanation of the taxes imposed upon the industry can discover a wealth of material in publications of the Mid-Continent Oil and Gas Assn., the Petroleum Industry Research Foundation and the API.) Petroleum Industry Research Foundation and the API.) The Tax Climate

Information compiled by the API reveals that the industry paid $2.5 billion in federal, state and local taxes on earnings, operations and properties in 1966. In 1965, the direct tax burden was $2.0 billion and in 1964, $1.7 billion. In addition to these direct taxes, sales and excise taxes on gasoline and other products amounted to $8 billion in 1966. Taxes paid to other countries by members of the industry are not included in these amounts.

For 1965, the 27 leading companies paid 5.43 cents in direct taxes for each dollar of gross revenue. This compares with 4.62 cents for all business corporations, including petroleum companies, and with 5.50 cents for other types of mining and manufacturing companies. These figures show that despite favorable federal income treatment the industry's direct tax burden is about the same as that of other business corporations. If sales and other excise taxes levied upon gasoline and other products were included in the 1965 compilation, the tax burden for the same 27 companies would be about 21 cents on each dollar of gross revenue. Among major consumer products only tobacco and alcohol carry a greater burden.

The fact that the industry bears a substantial tax burden is not widely known. To the contrary, the public seems to believe that the federal income tax is the only substantial burden imposed upon business. The industry's favorable income tax treatment is common knowledge. Perhaps this explains why so marry who want a revised system point to the differential treatment of oil and gas as a flagrant example of alleged defects in the law.

Tax law, like all law, flows from a political process. The importance of public opinion on this process would be difficult to overemphasize. The federal income tax is a prime example of how tax law is created in the political prime example of how tax law is created in the political process. The 16th Amendment to the Constitution (which process. The 16th Amendment to the Constitution (which made the federal income tax lawful) reflected a majority view that the wealthy class in the North and East should be required to pay a greater share of the cost of federal government. The majority apparently had found the ideal tax-one that someone else paid. As originally enacted, the law exempted about 98 percent of the people. The vast majority of people paid no income tax until about 1940. The need for tremendous tax revenue to meet the national emergency of World War II caused a substantial change in direction. A class tax became a mass tax. This is not to say that the present law makes no class distinctions. The progressive rates remind us of the original purpose. But as the rates went up it became politically purpose. But as the rates went up it became politically feasible for Congress to make many distinctions between classes of taxpayers and types of income. And so it is that the income from growing crops may be taxed differently from the income from raising cattle. An inventor receives capital gains treatment, but not the writer or composer. Differential treatment is extended to the aged, the married and the blind. Such distinctions are almost endless. All law is, of course, based upon distinctions. The questions is whether or not a particular distinction is desirable. Since nothing hurts like the loss of money, each taxpayer has his own opinion.The industry's problem is magnified because so many groups with diverse interests have banded together to attack the distinctions made for oil and gas producers. There is a sizeable and vocal group in this country who would eliminate all differential income tax treatment. Their announced goal is equality, a concept which has almost universal appeal. They would retain progressive rates because they say progression is not inconsistent with equality. It is assumed that as income increases so does ability to pay. In other words, without progression, some income is more equal than others. Just how they determine what rate of progression is needed to insure equality is not clear. The point is that critics of the present law are growing in number and in influence. Members of the industry are aware of the public relations problem this presents. Obviously, the law will be changed if the majority presents. Obviously, the law will be changed if the majority demands it.