Talking with the Taxman About Petrol

Tax Day Is Much Easier for Big Oil than for the Middle Class

Big Oil’s tax day burden is relatively light compared to that of the typical middle-class family, writes Daniel J. Weiss.

This February 2012 photo shows gas prices at a Pittsburgh Exxon mini-mart. ExxonMobil is one of the big five oil companies that has an effective federal tax rate that is lower than the average middle-class family in America.
<br /> (AP/Gene J. Puskar)
This February 2012 photo shows gas prices at a Pittsburgh Exxon mini-mart. ExxonMobil is one of the big five oil companies that has an effective federal tax rate that is lower than the average middle-class family in America.
(AP/Gene J. Puskar)

When one voice rules the nation
Just because they’re top of the pile
Doesn’t mean their vision is the clearest
—“Ideology,” Billy Bragg, from the album “Talking with the Taxman About Poetry

Tax day is not a happy day for many Americans. People pay their share of taxes, with the bill often higher than anticipated. Americans, however, understand that paying their fair share of taxes is vital to supporting the military, cancer research, college aid, and many other programs that are essential to our security, prosperity, and freedom.

Not everyone needs to dread tax day, though. Big Oil companies frequently pay far less than their fair share of taxes, while benefiting from generous tax breaks unavailable to the average family or business. As with many aspects of the American economy today, tax breaks for Big Oil enable some of the richest corporations to receive much more favorable treatment than middle-class families.

Make no mistake: These are extremely rich corporations. In 2011 the big five oil companies—BP, Chevron, ConocoPhillips, ExxonMobil, and Shell—made a record-high total of $137 billion in profits. This new record was due to high gasoline and oil prices that filled their coffers with money from Americans’ wallets. Throughout the past decade, these five companies have raked in more than $1 trillion in profits.

Fortune magazine ranks ExxonMobil, Chevron, and ConocoPhillips as the first-, third-, and 16th-most profitable companies in the United States. And in 2011 these three companies finished second, third, and fourth, respectively, in the Fortune 500 ranking of the largest American companies.

These three companies are doing so well that in 2011 they spent a total of $37 billion—nearly half of their total profits—buying back their own stock, a move that enriches their board, senior managers, and large shareholders. Chevron, ConocoPhillips, and ExxonMobil also held $33 billion in cash reserves.

With such high profits and so much money, these companies must pay a lot in federal taxes, right? Well, that’s what Big Oil wants you to think. But in actuality these companies use different calculations to artificially inflate their tax payments in the public’s eyes. Reuters reported on March 26, 2012, that

The industry lumps together U.S. and foreign taxes. It includes taxes that are deferred and thus not paid yet. U.S. companies must pay taxes on profits earned abroad, but they can defer these taxes until they bring the cash into the country.

The big five use this tactic of hoarding cash overseas in tax havens to cut their tax rates drastically. Exxon, in fact, uses at least 20 tax shelters.

Reuters also determined that in 2011

Exxon Mobil paid 13 percent of its U.S. income in taxes after deductions and benefits in 2011, according to a Reuters calculation of securities filings. Chevron paid about 19 percent.

And Reuters reports that ConocoPhillips paid an effective federal tax rate of 18 percent last year.(1) These tax rates, Reuters concludes, are “a far cry from the 35 percent top corporate tax rate.”

To further put this into perspective, the average American household paid an effective federal tax rate of 20 percent in 2007, the last year for which data are available.

What’s more, 2011 was not an anomaly for the three largest American oil companies. Citizens for Tax Justice estimated that in previous years, these companies have also paid significantly lower taxes. (see Figure 1)

A disturbing pattern for Big Oil

One of the reasons these companies pay relatively low federal tax rates is that they receive a substantial portion of the government’s tax breaks for Big Oil companies, which is about $40 billion for a decade’s worth. The big five oil companies will receive an estimated $24 billion—or 60 percent—from these special provisions over the coming decade.

Despite their riches, however, Big Oil companies fight like tigers to retain their tax breaks. ExxonMobil, for instance, recently lobbied against an effort to curtail its tax breaks by opposing the “Repeal Big Oil Subsidies Act,” S. 2204, sponsored by Sen. Robert Menendez (D-NJ), when the Senate voted on it March 26. This bill would have eliminated the $24 billion in tax breaks for the big five oil companies and instead invested these revenues in clean energy technologies that would reduce our dependence on oil. The bill failed 51 to 47 because 60 votes were required to pass it.

Exxon had the audacity to claim that eliminating these tax breaks would “raise taxes on energy companies.” This ignores the Congressional Joint Committee on Taxation’s definition of tax breaks that made it clear they are simply government expenditures in a different guise:

Special income tax provisions are referred to as tax expenditures because they may be considered to be analogous to direct outlay programs, and the two can be considered as alternative means of accomplishing similar budget policy objectives. Tax expenditures are similar to those direct spending programs that are available as entitlements to those who meet the statutory criteria established for the programs. [emphasis added]

A Center for American Progress analysis found that numerous Republican and conservative leaders have also acknowledged that special tax breaks similar to those for Big Oil companies are essentially the same as subsidy programs that spend money directly. This list includes:

  • Martin Feldstein, former President Ronald Reagan’s top economic advisor
  • Former Senate Budget Committee Chairman Pete Domenici (R-NM)
  • House Ways and Means Committee Chairman Dave Camp (R-MI)
  • Speaker of the House John Boehner (R-OH)

Despite Big Oil’s repeated protests, their tax day burden is relatively light compared to that of the typical middle-class family. This is particularly true after the big five oil companies’ banner year of record profits in 2011. While we may dislike tax day, Big Oil companies can relish it, knowing that they have it easy compared to most Americans.

It’s up to Congress to level the playing field by eliminating $40 billion in tax breaks so Big Oil companies will finally have to pay their fair share on the next tax day.

Daniel J. Weiss is a Senior Fellow and the Director of Climate Strategy at American Progress. Thanks to Seth Hanlon, Director of Fiscal Reform at American Progress, and to Rebecca Leber, Research Assistant for the Think Progress War Room.

(1) An analysis of taxes paid by foreign companies BP and Shell is unavailable.

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Daniel J. Weiss

Senior Fellow