When the Deepwater Horizon disaster set off the worst oil spill in U.S. history, it was flying the flag of the ...
When the Deepwater Horizon disaster set off the worst oil spill in U.S. history, the drilling platform was flying the flag of the Marshall Islands. Registering there allowed the rig’s owner to significantly reduce its U.S. taxes.
The platform’s owner, Transocean, moved its corporate headquarters from Houston to the Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also helped it avoid taxes.
At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon, a deduction of more than $225,000 a day since the lease began.
With federal officials considering a new tax on petroleum production to pay for the Gulf spill’s cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, and an increased dependence on foreign oil.
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An examination of the U.S. tax code indicates oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.
According to the most recent study by the Congressional Budget Office, released in 2005, capital investments such as oil-field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.
For many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits. These companies’ returns on those investments are often higher after taxes than before.
“The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant,” said Sen. Robert Menendez, D-N.J., who has worked on a bill that would cut $20 billion in oil-industry tax breaks during the next decade. “There is no reason for these corporations to shortchange the American taxpayer.”
Oil-industry officials say the tax breaks, which average about $4 billion a year according to various government reports, are a bargain for taxpayers. By helping producers weather market fluctuations and invest in technology, tax incentives are supporting an industry that the officials say provides 9.2 million jobs.
The American Petroleum Institute, an industry advocacy group, says that even with subsidies, oil producers paid or incurred $280 billion in U.S. income taxes from 2006 to 2008, and pay a higher percentage of their earnings in taxes than most other U.S. corporations.
As oil continues to spread across the Gulf of Mexico, however, the industry is being forced to defend tax breaks that some say are being abused or outdated.
The Senate Finance Committee on Wednesday said it was investigating whether Transocean had exploited tax laws by moving overseas to avoid paying taxes in the United States. Efforts to curtail the tax breaks are likely to face fierce opposition in Congress; the oil and natural-gas industry has spent $340 million on lobbyists since 2008, according to the nonpartisan Center for Responsive Politics, which monitors political spending.
Jack Gerard, president of the American Petroleum Institute, warns that any cut in subsidies will cost jobs.
“These companies evaluate costs, risks and opportunities across the globe,” he said. “So if the U.S. makes changes in the tax code that discourage drilling in Gulf waters, they will go elsewhere and take their jobs with them.”
Some government watchdog groups say that only the industry’s political muscle is preserving the tax breaks. An economist for the Treasury Department said in 2009 that a study had found that oil prices and potential profits were so high that eliminating the subsidies would decrease U.S. output by less than half of 1 percent.
In the past 10 years, oil companies have been aggressive in using foreign tax havens. Many rigs, such as Deepwater Horizon, are registered in Panama or on the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations.
Transocean — which has about 18,000 employees worldwide, including 1,300 in Houston and about a dozen in Zug, Switzerland — has saved $1.8 billion in taxes since moving overseas in 1999, a recent study for the trade publication Tax Analysts found.
Transocean said that it had paid more than $300 million in taxes for 2009, and that its move reflected its global scope, with only 15 of its 139 rigs in the United States. “Transocean is truly a global company,” it said in a statement.
It is far from certain that Congress will eliminate the tax breaks. As recently as 2005, when windfall profits for energy companies prompted President George W. Bush — a former Texas oilman — to publicly call for an end to incentives, the energy bill he and Congress enacted still included $2.6 billion in oil subsidies. In 2007, after Democrats took control of Congress, a move to end the tax breaks failed.