0
.
GENERAL
INTEREST
H
Tax Burden of the Oil and Gas Industry
SCHUETTE
PADUCAH, KY.
& TAYLOR
J. LANE PECK
I
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tax — one that someone else paid, As originally enacted,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.
Abstract
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
costs.
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..
@
124s
DECEMBER,
1968