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Big Oil's Back in Washington's Taxation Crosshairs

By David Smith - Apr 14, 2013 at 2:15PM

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D.C. has its sights set on the industry once again.

There's probably not another industry that even begins to match the members of Big Oil for generating antipathy in some quarters of Washington, D.C. Indeed, there are those in our nation's capital whose clear intent it is to force the largest oil and gas producers to pay through the nose for their successes.

In his 2012 State of the Union address, President Obama stated, "The country needs an all-out, all-of-the-above strategy that develops every available source of American energy." Fine, but that statement masked a punitive approach that the president had in mind for the bigger traditional energy companies, especially those that quest for crude oil worldwide.

Indeed, it was only a few minutes later that the president contended:

We have subsidized oil companies for a century. That's long enough. It's time to end the taxpayer giveaways to an industry that's rarely been more profitable and double-down on a clean-energy industry that's never been more promising.

The obvious implication there was that the industry has long received special favors at tax time. Which, of course, it hasn't. Indeed, the latter statement may imply confusion between the treatment accorded to ExxonMobil (XOM 1.27%) and that provided to, say, Solyndra.

A targeted nailing
Nevertheless, some members of the president's party are heeding his clarion call. In fact, Chris Van Hollen, a Democratic congressman from Maryland, is attempting to gain support for a bill that would place the industry's companies at a clear disadvantage at tax time. His "Fair Share on High-Income Taxpayers" scheme would alter the way oil and gas operators' taxes are calculated -- especially for the larger companies -- in three key ways:

  • By limiting oil and gas producers' ability to avail themselves of the Section 199 deduction. That measure was part of the American Jobs Creation Act, which generated bipartisan support at its passage in 2004. It simply provides a 9% reduction from net income for businesses involved in the manufacturing sector. Its purpose was to serve as something of a moat to protect, at least somewhat, against foreign competition.

    Is it a measure that solely benefits energy producers? Hardly. In fact, energy companies generally have been limited to 6% deductions, while those involved in a wide range of other manufacturing endeavors receive the full 9%.
  • By limiting the industry's use of the last-in, first-out method of valuing inventory. While a host of companies from all manner of industries have adopted what is commonly referred to as the LIFO method, Van Hollen's bill would render it largely off-limits to oil and gas producers.
  • By limiting the integrated companies' deductions of royalty payments made to foreign governments. American companies operating overseas are generally permitted to deduct from their U.S. levies the taxes imposed by foreign governments -- a method of preventing double taxation on their foreign income. Royalty payments made abroad have typically -- and legally -- been treated as taxes, making them subject to the foreign deduction. But Van Hollen's bill would eliminate that approach, thereby substantially ramping up the domestic taxes required of the integrated companies.

Is this "special" treatment being proposed for the traditional oil and gas companies appropriate? Have they, in fact, been shirking their duty to render unto Caesar that which is Caesar's?

Massive payments already
Absolutely not. Harking back to 2011, of the top 25 corporate-tax payers, we see that ExxonMobil easily had first place locked up. Its $27.3 billion in income tax payments made for an effective tax rate of approximately 42%. Chevron (CVX -0.23%) was next with $17.4 billion in income taxes paid, for a 43.3% effective rate. And ConocoPhillips (COP 1.44%) was in third place, its 45.6% effective rate making for tax payments of $10.6 billion. But that wasn't all. In addition to its income taxes, Exxon, for instance, recorded another $70 million-plus in sales taxes and other taxes and duties.

For comparison's sake
Compare those tax payments and percentages with those of Apple (AAPL 2.54%), which, from a market capitalization perspective, is larger than ExxonMobil. The California technology superstar paid income taxes of about $4 billion in 2011, an effective rate of just 24.6%. And McDonald's (MCD -0.99%), which checked in at 25th place on the list of "elite" taxpayers, forked over $2.1 billion in taxes. Its effective rate: 31.3%.

But maybe profitability -- net income as a percentage of revenues -- is a better way to determine which corporations should be accorded punitive treatment at tax time. Maybe Exxon et al. are simply too profitable. Wrong again. Neither Exxon nor Chevron topped 10% in net profit margins for 2011. Conversely, the margins for technology leaders Apple and Microsoft (NASDAQ: MSFT) were 26% and 32%, respectively.

A Foolish takeaway
So the disdain for Big Oil continues uninterrupted. One might think that, given the companies' success in helping to vastly expand U.S. oil and gas reserves in recent years, along with their need to push into inhospitable places such as the Russian Arctic in search of progressively more elusive reserves, they might begin to escape Washington's political crosshairs.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$149.24 (2.54%) $3.70
McDonald's Corporation Stock Quote
McDonald's Corporation
$241.63 (-0.99%) $-2.41
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$92.11 (1.27%) $1.16
Chevron Corporation Stock Quote
Chevron Corporation
$172.61 (-0.23%) $0.40
ConocoPhillips Stock Quote
$107.02 (1.44%) $1.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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