Tax Burden of the Oil and Gas Industry  
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tax — one that someone else paid, As originally enacted,  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 11 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 distinc-  
tions. The progressive rates remind us of the original  
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 dilTer-  
ently 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 Ioss 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  
demands it.  
This paper describes the existing tax clintate, summarizes  
the industry’s javorable treatment under the jederal in-  
come tax !aw, discusses current federal income tax prob-  
lems, notes the magnitude oj state and local taxes and  
attempts to predict future tax developments.  
(Those who  
are interested in a detailed explanation oj the taxes im -  
posed upon (he industry can discover a weal[h oj material  
in pu.hlicati(ms oj the Mid-Continent Oil & Gas Assn., the  
Petroleum Industry Research Foundati(m muI the A PI.)  
The Tax Climate  
Information compiled by the API reveals that the in-  
dustry paid !32.5 billion in federal, state and local taxes  
on earnings, operations and properties in 1966. In 1965,  
the direct tax burde~ 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 companiea paid 5.43 cents in  
direct taxes for each dollar of gross revenue. This com-  
pares with 4.62 cents for all business corporations, includ-  
ing petroleum companies, and with 5S0 cents for ~’her  
types of mining and manufacturing companies. These  
figures show that despite favorable federal income treat-  
ment 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 many who want a revised system point  
to the differential treatment of oil and gas as a flagrant  
example of alleged defects in the law.  
The Federal Income Tax  
Let us now review those provisions of the law that  
cause so much adverse publicity for the industry, The  
storm of protest is focused upon the depletion allowance  
and the deduction for intangible drilling and development  
We hear a lot about the depletion “loophole”. The term  
“loophole” is generally understood to mean an ambiguity  
or omission in the text of a statute that permits the intent  
of the law to be circumvented. The fact is that percentage  
depletion has been a part of the statutes since 1926. The  
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  
process. The 16th Amendment to the Constitution (which  
made the federal income tax lawful) refleeted a majority  
Original manuscript received in Society of Petroiemn Engineers 05tice  
Aug. 29, 196S. Supplementary  
materiai received Sept. 25, 196S. Paper  
(SPE 2196) was presented at SPE 4%xt Annual Fall Mwting held in  
Houston, Tex., Sept. 29-Ott. 2, 1968. Copyright 196S American In-  
etitute of Mining, Metailurgicrd, and Petroieum Engineers, Inc..