Do Oil Companies Pay Enough in Taxes? Or Too Much?

In the most recent budget proposal from the Obama administration, there are several mentions about increasing revenue from oil and gas companies to fund efforts in the Department of Energy to spur clean-energy initiatives. The oil and gas industry is vehemently opposed to the idea, claiming that the government is using the industry as a piggy bank for its new energy endeavors. At the same time, many advocates claim that major oil companies don't pay their fair share of income taxes.

Can both sides be right? In a way, yes. Let's look at both sides of the argument and see how the case can be made for both.

What happened to 35%?
Based on federal regulations, the corporate federal tax rate is roughly 35% for any company that makes over $18 million a year in income. But just like individuals filling out their tax forms, the amount that is paid is rarely the same as that individual's effective tax bracket. There are always plenty of deductions and additions that are used to adjust income. With all of these tax benefits, the amount that ultimately goes to the IRS might not even approach that number. Just look at ExxonMobil's (NYSE: XOM  ) and Chevron's (NYSE: CVX  ) income tax levels for 2012.

Company Earnings Before Taxes (USD Millions) US Income Taxes (USD Millions) Percent  of Income
Exxon 84,585 2,977 3.5%
Chevron 46,332 4,665 10%

Source: Company 10-Ks 

Tax rates like that are more than enough to enrage individuals who see a much larger part of their paycheck get taken away, and it certainly gives plenty of firepower for someone who wants to argue that oil companies don't pay enough. 

There are a couple things to consider when looking at these numbers. First, these are global oil companies, and not all of the taxes they pay are in the United States. Also, there are several taxes that are specific to the oil and gas industry that are not normally accounted for in income taxes. For example, oil companies need to pay $0.08 per barrel of oil for a trust fund that's used to pay for oil spills, and they need to pay royalties for any oil that produced on federal lands. When you figure in these additional taxes to Exxon's tax bill, you get a figure in the U.S. of $12.1 billion.

That brings the tax rate up to about 14%, which still seems pretty paltry for the world's largest company. What you also need to consider, though, is the word "world." With operations in more than 43 countries, each country wants a piece of that pie through its own taxes, royalties, and so on. When all of these things are tallied up worldwide, Exxon dolled out $102 billion to governments in 2012. 

Sticker price versus what you pay
Looking purely at U.S. income tax expenditures clearly doesn't give a full picture of what these major oil companies are paying in tax. To get a better look, let's examine their effective tax rates. This is a simple ratio for the income tax expense divided by the company's total earnings before taxes from the past 12 months.

According to S&P's Capital IQ, some the largest oil companies in the U.S. have the biggest tax rates around.

Company Effective Tax Rate
ConocoPhillips 51.5%
Royal Dutch Shell 46.6%
Chevron 43.2%
ExxonMobil 39.4%

Source: S&P Capital IQ,

So when all is said and done, the tax rate can be much higher than the 35% that goes to the IRS. What's probably even more surprising about those tax rates, though, is they're even much higher than for the major players in other parts of American industry.

Company Effective Tax Rate
Goldman Sachs 33.1%
JPMorgan Chase 26.2%
Google 16.6%
Apple 25.4%

Source: S&P Capital IQ.

What a Fool believes
The thing about numbers is that they can be easily presented in a way that gives credence to any argument, and any fact or truth can be produced to back up a claim. Do big oil companies like Exxon pay considerably lower U.S. income taxes than individuals? Yes. But do they pay a high tax rate that would seem unfair to other sectors? Yes. So if the Obama administration thinks the oil industry should pay its fair share, they can find a way to frame that argument, and the opposition can give its own side just as well.

While these types of arguments make for good cocktail party fodder, very rarely should taxes sway your investment decisions. To paraphrase Warren Buffett, when someone pitches a sound investment idea to you, the first thought in your mind is never "what will my tax rate be on the gain?" Rather, focus on solid companies that will perform no matter what business environment is out there.

One of those rock solid companies in the energy space that has the Buffett stamp of approval is National Oilwell Varco. It's good enough for Warren Buffet's portfolio, should it be in yours? To find out more, you're invited to check out The Motley Fool's premium research report featuring in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now to claim your copy.


Read/Post Comments (19) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2013, at 1:17 PM, mlebauer wrote:

    Taxing the oil companies more just discourages their activities in the US. As the story indirectly shows, they are already heavily off-shored.

    If the goal is to discourage fossil energy consumption, it's better to tax consumption directly, not indirectly through the companies. That just disadvantages US based companies and advantages foreign companies. Direct taxation is equally shared.

  • Report this Comment On April 30, 2013, at 6:16 PM, xetn wrote:

    If the goal is to confiscate wealth, more taxes are better. If, on the other hand, you wish to spur economic expansion, no tax is better.

    If you happen to have great growth at the same time as high tax rates, it does not follow that the high tax rates are the reason for the growth rate.

  • Report this Comment On April 30, 2013, at 6:25 PM, Jurobi wrote:

    You left off other taxes that are paid in the US. Each state charges a severance taxe on produced oil (in Texas this is 4.6% of the market value of oil or condensate produced, and 7.5% of market value of gas produced), and individual counties may charge an "ad valorem" tax on the minerals to the owners and operators of leases.

  • Report this Comment On April 30, 2013, at 11:35 PM, Kauaicat wrote:

    You failed to mention the US federal tax credit for taxes paid to foreign countries, a tax credit available to private individuals as well. Obama himself takes a foreign tax credit for the taxes paid to foreign countries from overseas sales of his books.

  • Report this Comment On April 30, 2013, at 11:53 PM, ershler wrote:

    First, why would you include royalties in the tax bill; it is like including the money oil companies pay to individuals.

    Second, what is happening with the trust fund to clean up oil spills? It would only be appropriate to call it a tax if the funds are being used for other things, otherwise they are just covering an expense.

  • Report this Comment On May 01, 2013, at 8:48 AM, ingwink wrote:

    I agree with ershler, the numbers including royalties and fees shouldn't be compared with the other tax rates.

  • Report this Comment On May 01, 2013, at 2:49 PM, drreimer wrote:

    I also agree with ershler and inqwink. Equating those expenses with the kinds of taxes most of us pay is just silly.

  • Report this Comment On May 01, 2013, at 5:13 PM, Canuck2010 wrote:

    Royalties are most definitely not a tax. They are the payment to the owner of the resource for extracting that resource, no matter whether the resource belongs to an individual, corporation or government entity. Not all payments to a government are taxes.

  • Report this Comment On May 03, 2013, at 12:55 PM, winchlargo wrote:

    royalties are not accounted for as taxes in the table showing effective tax rates. Foreign, states and other taxes are.

  • Report this Comment On May 03, 2013, at 1:34 PM, LAVol wrote:

    Oil and natural gas are the most heavily taxed commodities in the U.S. When you consider the severance taxes, ad valorem taxes, royalties (to state and fed), fuel taxes (as high as $0.38/gallon in some states), local taxes, ethanol subsidies, and income taxes, probably more than 50% of your gasoline cost is taxes. That's outrageous! When gas prices go up, so do the taxes. You don't ever hear the politicians griping about how much taxes contribute to the cost of gasoline, but they harp on the less than $0.05 per gallon the oil companies net on gasoline sales.

  • Report this Comment On May 03, 2013, at 1:36 PM, LAVol wrote:

    Royalies paid to states and the federal gov't are taxes, regardless of what they are called.

  • Report this Comment On May 03, 2013, at 7:37 PM, fabrice002 wrote:

    LAVol; you mean the oil companies should get the resources for free? That's why it's a Royalty, not a tax.

  • Report this Comment On May 03, 2013, at 7:40 PM, fabrice002 wrote:

    Mr. Crowe, please explain:

    Exxon's Earnings Before Taxes was $85 Billion USD,

    but

    Exxon dolled out $102 billion to governments in 2012.

    There must be some other caveats in there!

  • Report this Comment On May 04, 2013, at 6:17 AM, Razrbak80 wrote:

    You can call it fee, royalty, levy, or tax but if you pay it from your operating revenue to a government entity it no longer remains available for your employees or shareholders. Therefore it is a reduction from your assets and an increase to the various government entities.

  • Report this Comment On May 04, 2013, at 6:26 AM, Razrbak80 wrote:

    LAVol is correct in his comments. The oil and gas industry collects more taxes for the various government entities than any other industry, and yes the price that you finally pay at the pump could be reduced by over 50% if you eliminated all of the fees, taxes, royalties and levies. So let's be honest here and finally admit the obvious.

    Now go look at your phone or electric bill and see how much the actual cost of what you consumed is after you deduct all the fees and taxes. Wake up folks, it's not that the taxes are too low, the SPENDING is out of control.

  • Report this Comment On May 07, 2013, at 3:03 AM, moneytaxactivist wrote:

    I think that quibling over fair income tax rates is wasted energy. There has been some talk, lately, about revamping the tax system.

    Corporations are eager to get their special tax breaks and have started lobying in earnest.

    Congress does not talk of a revamp but an overhaul.

    Both of these terms are disappointing as they mean to keep the same system in place that we have all come to dispise.

    I propose scrapping a system that gives breaks to select individuals.

    Eliminate the need for wealthy individuals to keep their money in tax shelters or offshore.

    Royalties, by the way, are paid to the people through their government stewards of the public lands.

    Instead of the crazy interlocking and overlapping tax system that we now endure, we could implement a money tax, an Automatically Collected Transaction Tax.

    We could tax money, but only when it moves.

    And only when it moves electronicly.

    There is so much movement of vast sums of money through our financial system that, even a small tax, would suffice to operate our public services.

    Can you imagine, never filling out another income tax form? There is more information about this at http://moneytax.org

  • Report this Comment On May 15, 2013, at 5:30 PM, Penchant wrote:

    Royalties are a fee, If you were mining for gold and you did not own the land. What was your capital cost? The means of extraction only.

    A highly portable means in the case of oil.

    It's no different than building a car in factory. You buy the parts, assemble it and then market the product. You can't compare the acquisition of parts to taxes.

    The one difference is that the oil oligopoly is mostly governmental and has a price floor adjusted according to the quality of the crude pumped and how much they allowed to pumped. No different than premium parts or materials for assembly stemming from limited suppliers.

    The INSURANCE premiums exacted became taxes through what process. The insurer of last resort (US) said you need to have a fund for the spills that are INEVITABLY caused by these firms.

    That ain't a tax, bubba. That's sane public policy.

    This is a bunch of strawmen looking for a torch.

    .

  • Report this Comment On May 27, 2013, at 12:18 PM, compufixer wrote:

    Exxon Mobil is the largest U.S. oil company. However XOM is hardly big oil. There are 15 or 16 larger, all foreign-owned. Some private. Some many times larger than XOM. Many of these pay NO U.S. income tax on their sales in this country. In our zeal to tax "Big Oil", we run the risk of derailing the large economic bonus, specifically the jobs bonus, presented by the upturn in North American oil & gas production. I have a more sensible idea: tax all oil & gas sales in this country at 3% of sales. This is called an excise tax. Allow the excise tax payments to be taken as a credit toward U.S. income taxes. This would remove the unfair advantage for oil retailers that pay no income tax. More important, it would reduce the advantage for oil & gas producers that employ no or very few Americans. Since it would not in fact be revenue-neutral, it would reduce the federal deficit.

  • Report this Comment On January 21, 2014, at 2:38 PM, inteluck wrote:

    If royalties are tax, then the assumption is that the mere fact the oil company is extracting oil makes them the owner of that oil. I would argue all the natural resources of a nation are owned by the people of that nation, to be managed for the benefit of those people, including selling these assets at the highest price the market will bear, being mindful that the long term price of oil is sure to increase, thus leaving the oil in the ground can be seen as an investment. Should the current market not bear adequate return to the owners if sold, it should be retained until such a time as it will generate adequate returns, and a different asset which has a current hi market price sold instead. A resource rich nation like the US should seek to adequetely fund all its infrastucture and human development costs from the sale of its resources, and leave the costs associated with military spending to corporate income tax. This would dramatically alter the enthusiasm for war, and make the beneficiaries pay the cost.

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