A Project of The Annenberg Public Policy Center

Oil and Gas Company Tax Breaks


Q: What kind of tax breaks does the U.S. give to oil companies and to corporations that send jobs overseas?

A: Companies with overseas subsidiaries can keep their income untaxed by the IRS if they don’t transfer that revenue back to the U.S. Oil and gas companies received tax breaks and subsidies from a 2005 energy bill, but the bill led to a net tax increase for them.

FULL QUESTION:

When Democratic presidential candidates talk about tax breaks for corporations that ship our jobs overseas and tax breaks and subsidies for oil companies, what are they referring to and are they accurate?

FULL ANSWER:

It’s true that Sens. Hillary Clinton and Barack Obama have associated the transfer of U.S. jobs overseas with tax breaks, or loopholes, for companies that practice off-shoring:

Obama, Nov. 3, 2007: When I am president, I will end the tax giveaways to companies that ship our jobs overseas, and I will put the money in the pockets of working Americans, and seniors, and homeowners who deserve a break.

Clinton, Nov. 19, 2007: And we are going to finally close the tax loopholes and stop giving tax breaks to companies that ship jobs overseas. Enough with outsourcing American jobs using taxpayer dollars.

Both candidates are referring to a feature of the U.S. tax code that allows domestic companies to defer taxes on “unrepatriated income.” In other words, revenue that companies earn through their overseas subsidiaries goes untaxed by the IRS as long as it stays off the company’s U.S. books. 

But economists, including left-leaning ones, do not agree that eliminating this provision will bring an end to off-shoring. And here’s why: In the U.S., companies are taxed 35 percent on earnings of $10 million to $15 million or on all earnings over $18.3 million. That’s one of the highest corporate tax rates in the world, making an overseas move somewhat attractive to companies that wish to avoid the U.S. tax rate. But that’s not the leading reason companies send jobs overseas. According to a 2005 report by the Government Accountability Office, global technological advancement, increased openness of countries such as China and India, the higher education level of foreign workers in technological fields, and the reduced cost per foreign worker are all contributing factors to off-shoring.

We first addressed this popular theme in 2004, when we reported on a John Kerry campaign ad in which he blamed President George W. Bush for providing tax incentives to companies “outsourcing” jobs overseas. At the time we found that such tax breaks, which do exist, pre-dated the Bush administration and that even Democratic-leaning economists did not support the idea that changing the corporate tax code would end the movement of jobs overseas.

Three years later, in Dec. 2007, we reported on an ad launched by a labor group in support of John Edwards. The ad implied that corporate tax breaks were responsible for the shipment of jobs overseas from an Iowa Maytag plant. We found that the jobs were actually sent to Ohio and that, again, eliminating such tax breaks would not go far in stanching the flow of jobs overseas.

Oil Company Tax Breaks?

Both leading Democratic candidates have referred to tax breaks to oil companies:

Clinton, July 23, 2007: First of all, I have proposed a strategic energy fund that I would fund by taking away the tax break for the oil companies, which have gotten much greater under Bush and Cheney.

Obama, June 22, 2007: In the face of furious lobbying, Congress brushed aside incentives for the production of more renewable fuels in favor of more tax breaks for the oil and gas companies.

Both candidates are referring to H.R. 6, the 2005 energy bill that contained $14.3 billion in subsidies for energy companies. However, as we’ve reported numerous times, a vast majority of those subsidies (all but $2.8 billion) were for nuclear power, energy-efficient cars and buildings, and renewable fuels research. In addition, according to the nonpartisan Congressional Research Service, the tax changes in the 2005 energy bill produced a net tax increase for the oil and gas companies, as we’ve reported time and time and time again. They did get some breaks, but they had more taken away.

-Emi Kolawole

Sources

Remarks of Senator Barack Obama: A Change We Can Believe In. 3 Nov. 2007. Obama for America. 26 Feb. 2008.

ECONOMY: Policy Address on America’s Economic Challenges. 19 Nov. 2007. Hillary Clinton for President. 26 Feb. 2008.

Remarks of Senator Barack Obama: Taking Our Government Back
. 22 Jun. 2007. Obama for America. 26 Feb. 2008.

Democratic Presidential Debate. 23 Jul. 2007. CNN Transcripts.

Congressional Research Service. "Oil and Gas Tax Subsidies: Current Status and Analysis." Washington: GPO, 2007.

U.S. Government Accountability Office. "Offshoring of Services: An Overview of the Issues," Nov. 2005.