ExxonMobil paid no U.S. federal income tax in 2009. In fact, it was entitled to a $156 million tax refund. Why? The answer is more boring than you think: It overpaid its 2008 taxes.
ExxonMobil was required to bolster its pension plan by $3 billion when the market went down in 2008. According to Alan Jeffers, Exxon’s media relations manager, this overpayment reduced the amount of taxes owed in 2008, but the tax adjustment wasn’t made until one year later, which led to an overpayment and the refund in 2009.
But what’s more interesting about this story is Exxon’s effective income tax rate. Exxon has over the past couple years paid a U.S. federal income tax that is about 10 percent lower than its non-U.S. effective tax rate. Other oil companies also pay less, and in some years this difference has approached 50 percentage points.*
Oil companies pay less in U.S. taxes in part because they receive generous tax subsidies. These subsidies will cost the U.S. government about $3 billion next year in lost revenue and nearly $20 billion over the next five years.
Tax expenditures are government spending through the tax code. They are distributed through deductions, exclusions, credits, exemptions, preferential tax rates, and deferrals. What makes them look different from grants or checks is that they are delivered through the tax code as part of tax expenditure spending programs.
These tax expenditures can amount to a significant portion of federal subsidies for oil and gas. The cost of tax expenditure programs for oil and gas companies made up about 88 percent of total federal subsidies in 2006.
As Jeffers stated, “I’m not in a position to make a judgment on the tax policy, but what it is we adhere to.” Tax expenditures are simply a function of our country’s tax policy.
Exxon will continue to adhere to current tax policy, enjoying the tax subsidies it receives from it…unless Congress cuts these subsidies.
And there’s good reason to believe that Congress should cut them. The billions in tax subsidies we spend each year should support government priorities that generate results and value for the American people. And it’s not clear that a few billion in subsidies for oil companies does much to impact their business decisions.
According to estimates from the Office of Economic Policy at the Department of Treasury, removing subsidies for the oil industry would at most affect domestic production by less than one-half of 1 percent.
Billions of dollars in tax subsidies can make or break some industries, but they may not be as important to oil companies. Even Exxon recognizes that other types of government action may affect its bottom line more than tax subsidies. Jeffers noted, “We are advocating for opening up public resources. [Support for oil companies] is fundamentally about what you want your public policy to do.”
So billions in tax subsidies may not be doing much of anything. But who would look a gift horse in the mouth? Eliminating these billions could make a real difference to American taxpayers.
Cutting this spending could help reduce our fiscal deficit. President Obama is creating a bipartisan commission to examine spending cuts that will reduce the deficit. The $20 billion saved over the next five years from eliminating these programs would be enough to cover this year’s Federal Drug Administration’s budget and the operations of the Smithsonian Institution, with a little left over.
Or the federal government could use the savings to fund America’s transition to a clean energy economy by financing a Green Bank, making thousands of homes energy efficient, building new transmission lines, or extending financial supports for renewable energies. Real money is at stake.
Tax expenditure spending programs should support public policies. Our country has made clear its commitment to clean energy. President Obama, along with 19 other world leaders at the G-20 conference in Pittsburg, signed a pledge to phase out subsidies for fossil fuels. If the government’s energy policy supports clean energy initiatives, it doesn’t make sense to put billions in tax subsidies for oil companies.
As Jeffers said, “Determine what your public policy is, and then you have a number of levers to obtain that goal. It’s not for me to say whether tax is an appropriate lever or not, that’s for someone else.”
That someone else is Congress.
*Effective tax rates calculated under the methodology used by Citizens for Tax Justice.
Sima Gandhi is a Senior Policy Analyst with the Doing What Works project at the Center for American Progress.
For more information on tax expenditures, see: