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Assessing the U.S. Federal Tax Burden on Oil and Gas Extraction

Abstract:
This paper assesses the burden of the Federal income tax on oil and gas extraction. It examines departures from neutrality between oil and gas and other activities, among different types of oil and gas properties, and between independent and integrated producers.' Effective tax rates on different oil and gas properties are derived by computing the required profitability on new investments, given the tax laws and an assumed after-tax discount rate.Our analysis shows that oil and gas extraction is taxed more favorably than most other business activities under both current law and the law in effect prior to the Tax Reform Act of 1986 (TRA). The effective tax rate on oil and gas investments is very sensitive to characteristics of the property and of the company developing it, but it is lower than effective tax rates on otherindustries in all the cases we examined.

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Energy Specializations: Petroleum – Exploration and Production; Petroleum – Policy and Regulation; Natural Gas – Policy and Regulation

JEL Codes:
D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Oil and gas extraction, Taxes, US, DCF model, oil investment

DOI: 10.5547/ISSN0195-6574-EJ-Vol8-No4-5


Published in Volume 8, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.