Big surprise: fossil fuels win under tax reform
Analysis of the early post-tax reform data from large public companies suggests that many profitable firms are paying no federal income taxes, and often getting refunds. Firms involved with fossil fuels have been big winners. An April paper by the Institute on Taxation and Economic Policy in Washington, DC reviewed data on Fortune 500 firms. They found 60 that paid zero federal corporate income taxes despite having significant pretax income. Indeed:
The report finds that in 2018, 60 of America’s biggest corporations zeroed out their federal income taxes on $79 billion in U.S. pretax income. Instead of paying $16.4 billion in taxes at the 21 percent statutory corporate tax rate, these companies enjoyed a net corporate tax rebate of $4.3 billion.
Goals versus political reality of tax reform
Good tax reform isn't supposed to do this. In return for cutting tax rates on everybody to spur economic activity, properly-structured reforms are supposed to eliminate tax subsidies to everybody at the same time. Lower rates, broader base. Reforms should yield a lower tax burden on all economic activity while simultaneously removing politically-driven disparities between different sectors of the economy. People keep more of what they make, market pricing signals are cleaner, and revenue impacts are reduced.
Or so goes the theory. This ideal policy outcome for society as a whole is very different from what "winning" tax reform looks like at the firm level. Industry lobbyists want to see rates cut on everybody, but cut even more for their sector. And they would like for everybody else to lose their tax subsidies while somehow keeping their own.
This type of political outcome flows only to the powerful. In the massive Tax Reform Act of 1986, many tax subsidies were cut -- though most of those to oil and gas remained. And despite lots of new windmills and solar cells popping up around the country, the fossil fuel industry remains powerful.
As the tax reform package was nearing a vote at the end of 2017, I noted this concern in my review:
A combination of key subsidies to fossil energy remaining untouched while core subsidies to renewables are repealed, along with significant use of tax‐favored corporate structures by oil and gas both suggest that were the current proposals to become law, they would materially benefit fossil fuel industries relative to other energy market participants.
Unfortunately, this seems to be how things are playing out. The Tax Cuts and Jobs Act (TCJA) did greatly cut corporate rates across the board (from 35% to 21%). But it also cut the overall tax burden (corporate plus personal) on Master Limited Partnerships used mostly by oil and gas firms even more. For example, a special amendment by Senator Cornyn of Texas ensured that an ability to deduct 20% of income was not limited by the wage payments made by the partnership, a constraint applicable to most other partnerships under TCJA.1
Capital equipment expensing was also broadly implemented, with the majority of the gains flowing to capital-intensive industries with long-lived capital assets, such as fossil fuels. And those deductions can be taken on used assets too, not just new. Here's the Oil & Gas Journal:2
Importantly, the Act allows the 100% deduction for capital expenditures used to acquire pre-existing (that is, used) property from unrelated persons. In the current oil and gas environment, where companies are shedding non-core assets, the 100% bonus depreciation regime provides an extra incentive for buyers of such assets to close deals in the next 5 years.
The Oil & Gas Journal review reported on modeling by long-time industry consultant Wood Mackenzie. Wood Mack looked at how the TCJA affected asset values within the exploration and production sector of US oil and gas markets. They indicated a post-tax increase of more than $190 billion.
ITEP: More than one-third of profitable firms in their review that paid no federal taxes in 2018 were oil and gas or utilities
ITEP periodically analyzes the effective tax rates of publicly traded companies. Earlier this month, their analysts looked at Fortune 500 companies post tax reform and found that 60 of the profitable firms were paying zero in federal income tax.3 I sorted their data by industry to focus in on the sub-groups most directly linked to fossil fuels: oil, gas & pipelines; and gas & electric utilities. Twenty-two of the 60 firms paying no taxes were in these two sectors. As shown below, they comprised 47% of the group's total pre-tax income and 41% of the net federal tax refunds.
ITEP notes that renewable production tax credits were one of the causes of low tax rates for the utility firms. To assess the import of this factor, I included data on renewable PTCs claimed, as reported by ITEP; and assessed the share of tax underage from the new statutory rates that the renewable PTCs comprised.
In a few cases, the benefits were significant: renewable PTCs dominated the underage for one utility and were material in a second. However, for most of the utilities (and all of the oil, gas and pipelines segment), other factors drove the results. The utilities include renewable and nuclear infrastructure, but continue to be dominated by natural gas and coal in most cases.
Table 1: Many profitable firms in oil, gas, and utility sectors paying no federal tax under TCJA
|Company||Industry||US pre-tax income||Federal Tax||Avg. Effective Federal Tax Rate||Corporate rate, 21%||Spread: Actual vs. statutory @ 21%||Renewable PTCs Claimed||PTCs as share of tax underage at new rates|
|A||B||B/A||C = (.21*A) - B||D||D/C|
|Chevron||Oil, gas & pipelines||$4,547||($181)||-4.0%||$955||$1,136|
|EOG Resources||Oil, gas & pipelines||$4,067||($304)||-7.5%||$854||$1,158|
|Occidental Petroleum||Oil, gas & pipelines||$3,379||($23)||-0.7%||$710||$733|
|Duke Energy||Utilities, gas and electric||$3,029||($647)||-21.4%||$636||$1,283||$ 129||10.1%|
|Dominion Resources||Utilities, gas and electric||$3,021||($45)||-1.5%||$634||$679||$ 21||3.1%|
|American Electric Power||Utilities, gas and electric||$1,943||($32)||-1.6%||$408||$440|
|Kinder Morgan||Oil, gas & pipelines||$1,784||($22)||-1.2%||$375||$397|
|Public Service Enterprise Group||Utilities, gas and electric||$1,772||($97)||-5.5%||$372||$469|
|FirstEnergy||Utilities, gas and electric||$1,495||($16)||-1.1%||$314||$330|
|Xcel Energy||Utilities, gas and electric||$1,434||($34)||-2.4%||$301||$335||$ 75||22.4%|
|Devon Energy||Oil, gas & pipelines||$1,297||($14)||-1.1%||$272||$286|
|Pioneer Natural Resources||Oil, gas & pipelines||$1,249||$0||0.0%||$262||$262|
|DTE Energy||Utilities, gas and electric||$1,215||($17)||-1.4%||$255||$272||$ 223||81.9%|
|Wisconsin Energy||Utilities, gas and electric||$1,139||($218)||-19.1%||$239||$457||$ 12||2.6%|
|PPL||Utilities, gas and electric||$1,110||($19)||-1.7%||$233||$252|
|Halliburton||Oil, gas & pipelines||$1,082||($19)||-1.8%||$227||$246|
|Ameren||Utilities, gas and electric||$1,035||($10)||-1.0%||$217||$227|
|CMS Energy||Utilities, gas and electric||$774||($67)||-8.7%||$163||$230||$ 14||6.1%|
|Atmos Energy||Utilities, gas and electric||$600||($10)||-1.7%||$126||$136|
|Cliffs Natural Resources||Oil, gas & pipelines||$565||($1)||-0.2%||$119||$120|
|UGI||Utilities, gas and electric||$550||($3)||-0.5%||$116||$119|
|MDU Resources||Oil, gas & pipelines||$314||($16)||-5.1%||$66||$82|
|Total, oil & gas; gas & electric utilities||$37,401||($1,795)||-4.8%||$7,854||$9,649|
|All companies in study||$79,027||($4,329)||-5.5%||$16,596||$20,925|
|Oil, Gas and Utility share of study total||47%||41%|
Source: ITEP (2019)
- 1. James Chenoweth and David Sinak (2017). "Houston, We have New Tax Rates – Guiding Oil and Gas Companies Through Tax Reform," Gibson, Dunn & Crutcher, 21 December (accessed 4/23/2019).
- 2. Conglin Zu, "US upstream and tax reform," Oil & Gas Journal, 2/26/2018.
- 3. Matthew Garder, Steve Wamhoff, Mary Martellotta and Lorena Roque (2019). "Corporate Tax Avoidance Remains Rampant Under New Tax Law: 60 Profitable Fortune 500 Companies Avoided All Federal Income Taxes in 2018," (Washington, DC: ITEP), April.