Oil derricks Photo credit:  Jim Hickcox / Flickr (CC BY-NC 2.0)

President Donald Trump’s tax reform outline calls for eliminating breaks for special interests, while dramatically lowering the overall corporate tax rate. But certain tax loopholes for Big Oil have proven especially difficult, even dangerous, to remove.

In 1956, sociologist C. Wright Mills wrote in his work The Power Elite, “Tax rates being high, the corporate rich are quite nimble in figuring out ways to get income, or the things and experiences that income provides, in such a way as to escape taxation.”

Individuals in the very top tax bracket in 1956, during the Eisenhower presidency, paid 91% of their income to Uncle Sam, while corporations paid 52%.

In 61 years, a lot has changed, but so much has stayed the same. Tax rates for the rich have fallen. Today the highest individual tax rate, for those who can’t hire a team of lawyers and accountants to get around it, is 39.6%, while corporations pay a nominal rate of 35%. Yet Republicans are not satisfied with these cuts and champion lower rates, promising economic manna as a result.

While rates have come down, the tax loopholes of which Mills spoke have only grown more complicated. Every year tax reform is publicly advocated, but the voluminous IRS tax code remains intact. One notable loophole is the oil and mineral depletion allowance.

King Oil

It really is a game—and the stakes are dangerously high.

Mills wrote, “Aside from capital gains, the most profitable tax loophole is perhaps the ‘depletion allowance’ on oil and gas wells and mineral deposits.” The law essentially treats oil or mineral resources as depreciable capital assets and allows a certain percentage of gross income to be deducted each year based on the resource. There are many related subsidies and tax breaks that benefit the oil and gas industries. Each year alone, taxpayers subsidize the oil industry by more than $4 billion.

It remains to be seen whether President Donald Trump will try to keep these subsidies in place. The outlines of his tax plan, while dramatically lowering the corporate rate from 35% to 15%, mentions “eliminating tax breaks for special interests.” But it’s clear that his energy policy is beholden to Big Oil. While the majority of climate scientists and nations are sounding the alarm on global warming, the president pulled the US out of the Paris Accord, and has previously called climate change a hoax invented by China. He has placed Rex Tillerson, former CEO of Exxon Mobile, as Secretary of State.

We thought it would be a good time to rerun this article.

Editor’s note: This article originally ran 05/23/2011.

So I was reading this New York Times explainer on yet another failure to take the oil industry off the sweet, sweet gravy train. And my mind went back a bit to what’s missing from the current discussion — the long, long history of tax breaks this powerhouse industry has won for itself over decades. It’s a little scary, though, so brace yourself.

Coming up: the history. But first, the Times:

The Senate on Tuesday blocked a Democratic proposal to strip the five leading oil companies of tax breaks that backers of the measure said were unfairly padding industry profits while consumers were struggling with high gas prices.

Despite falling eight votes short of the 60 needed to move ahead with the bill, top Democrats said they would insist that eliminating the tax breaks to generate billions of dollars in revenue must be part of any future agreement to raise the federal debt limit.

“We have to stand up and say, ‘Enough is enough,’ ” said Senator Al Franken, Democrat of Minnesota. “While oil prices are gouging the pocketbooks of American families, these companies are on a pace for a record profit this year.”

The defeat on Tuesday was expected since most Republicans were dug in against what they saw as a politically motivated plan in advance of the 2012 elections. Democrats had hoped that directing the savings toward the deficit would make it harder for Republicans to reject it.

The statement above, by the New York Times reporter, is an example of the maddening sort of thing common in the so-called “mainstream” press as it struggles to appear “fair and balanced.” Even Republican politicians would admit in private that they are never opposed to anything principally because it is “politically motivated.” Almost everything they do is politically motivated — if not for attracting voters than for appealing to financial backers. Please name one politically suicidal act of conscience performed by the GOP lately — or in the last ten years.

In the 52-to-48 vote, 3 Democrats joined 45 Republicans in opposing the bill, which was supported by the Obama administration and fiscal watchdog groups that saw the tax help for the oil industry as wasteful. Forty-eight Democrats, two independents and two Republicans backed it.

It’s not that it is wasteful. It’s that it is welfare for the rich — giving an unnecessary advantage to those who already have every advantage.

As I discovered in researching the background of the rise of the Bush family for my book Family of Secrets, so much of the unknown origins of political intrigue — from the strenuous lobbying effort to get the freshman Congressman George H.W. Bush appointed to the House Ways and Means Committee as a freshman, to John F. Kennedy’s political problems, to even Watergate — could be ascribed in part to the oil industry’s urgency for protecting tax breaks. Sometimes, the tax breaks have been the most important part of the industry’s profits. The most recent, defeated bill, sought to get rid of a number of loopholes and advantages. You can learn more here.

One of the key provisions in the bill concerned the oil depletion allowance. The allowance permits firms to recover their “capital investment — the costs of discovering, purchasing, and developing the well — over the period the well produces income.” The Senate bill did not propose getting rid of this highly attractive allowance, only modifying it so that the five biggest companies could not use a formula called “percentage depletion,” in which “total deductions could (and often do) exceed the taxpayer’s capital investment.”

So get this: all the Senate Dems were doing in the area of the depletion allowance was trying to keep just the five biggest companies from deducting more than their actual capital investment. They weren’t trying to get rid of this long-controversial depletion allowance, and weren’t trying to prevent any other oil companies from deducting more than they spent. Amazing! And this tepid measure still didn’t pass. (Of course, there were other provisions, including trying to block oil companies from sneakily reclassifying royalties paid abroad as “taxes” so they could deduct them domestically — a tax connivance on par with the depletion allowance in its one-sided benefit for the industry and harm to the greater good.)

The sordid history of just the oil depletion allowance alone reads like a Grisham thriller. Bad things happened to those who seriously threatened the allowance.

You’d like some particulars, you say? Here is a really long, related set of excerpts on the subject, collected from throughout the book:

…To head off this larger threat, it was clear to John F. Kennedy’s political advisers that he would have to campaign in Texas, along with Florida, in 1963. Kennedy was interested in revoking the oil depletion allowance, a decision that would have meant steep losses for Texas oilmen, and he continued voicing his support for civil rights, always a contentious issue in the South.…

President Kennedy demonstrated his willingness to buck big money during the “steel crisis” of April 1962, when he forced a price rollback by sending FBI agents into corporate offices. But Kennedy’s gutsiest — and arguably his most dangerous — domestic initiative was his administration’s crusade against the oil depletion allowance, the tax break that swelled uncounted oil fortunes. It gave oil companies a large and automatic deduction, regardless of their actual costs, as compensation for dwindling assets in the ground.

Robert Kennedy instructed the FBI to issue questionnaires, asking the oil companies for specific production and sales data. “The oil industry — in particular, the more financially vulnerable Dallas-based independents — did not welcome this intrusion. The trade publication Oil and Gas Journal charged that RFK was setting up a “battleground [on which] business and government will collide.”

FBI director Hoover expressed his own reservations, especially about the use of his agents to gather information in the matter. Hoover’s close relationship with the oil industry was part of the oil-intelligence link he shared with [CIA director Allen] Dulles and the CIA. Industry big shots weren’t just sources; they were clients and friends. And Hoover’s FBI was known for returning favors.

One of Hoover’s good friends, the ultra-rich Texas oilman Clint Murchison Sr., was among the most aggressive players in the depletion allowance dispute. Murchison had been exposed as far back as the early 1950s — in Luce’s Time magazine no less — as epitomizing the absurdity of this giveaway to the rich and powerful. Another strong defender of the allowance was Democratic senator Robert Kerr of Oklahoma, the multimillionaire owner of the Kerr-McGee oil company. So friendly was he with his Republican colleague Prescott Bush that when Prescott’s son, George HW Bush, was starting up his Zapata Offshore [oil] operation, Kerr offered some of his own executives to help. Several of them even left Kerr’s company to become Bush’s top executives.

…Lyndon Johnson shared in the prevailing oil belt enmity toward Kennedy. In fact, he was the one person in the White House the oilmen trusted….After Johnson ascended to the presidency, he and newly elected congressman Bush were often allies on such issues as the oil depletion allowance and the war in Vietnam….[oil executive Jack] Crichton (close with Bush and head of a secretive Dallas-based, oil-connected military intelligence unit that was deeply immersed in aspects of the tragic events of November 22, 1963) was so plugged into the Dallas power structure that one of his company directors was Clint Murchison Sr., king of the oil depletion allowance, and another was D. Harold Byrd, owner of the Texas School Book Depository building.….

When [George HW] Bush arrived in Washington after the 1966 elections, he was immediately positioned to help large moneyed interests, and by so doing improve his own political fortunes. His father, still influential, had twisted arms to get him a coveted seat on the House Ways and Means Committee, which writes all tax legislation. The committee was the gatekeeper against attempts to eliminate the oil depletion allowance, and Bush’s assignment there was no small feat. No freshman of either party had gotten on since 1904. But former senator [and investment banker] Prescott Bush had personally called the committee chairman. Then he got GOP minority leader Gerald Ford — a Warren Commission member and later vice president and president — to make the request himself. It was a lot of voltage, but the rewards were worth the effort. George HW Bush now would be a go-to rep for the oil industry, which could provide Nixon with the Texas financial juice he would need to win the Republican nomination in 1968….

During the Eisenhower years, the Texas oil industry really took off. George HW Bush was now part of a “swarm of young Ivy Leaguers,” as Fortune magazine put it, who had “descended on an isolated west Texas oil town — Midland — and created a most unlikely outpost of the working rich.” Central to these ambitions was continued congressional support for the oil depletion allowance, which greatly reduced taxes on income derived from the production of oil. The allowance was first enacted in 1913 as part of the original income tax. At first it was a 5 percent deduction but by 1926 it had grown to 27.5 percent. This was a time when Washington was “wading shoulder-deep in oil,” the New Republic reported. “In the hotels, on the streets, at the dinner tables, the sole subject of discussion is oil. Congress has abandoned all other business.”

Following the discovery of the giant East Texas oil fields in 1931, there was nothing Texas oilmen fought for more vigorously than their depletion allowance. From its inception to the late 1960s, the oil depletion allowance had cost taxpayers an estimated $140 billion in lost revenue. Nixon, backed by Prescott Bush and his friends, supported the allowance in 1946, while [the man he defeated and replaced in the  House, Democrat Jerry] Voorhis opposed it. Six years later, General Dwight D. Eisenhower supported the oil depletion allowance, and he got the oilmen’s blessings — and substantial contributions as well.…

In 1969, despite his earlier attempts to keep the peace among the party’s factions, new President Nixon was soon embroiled in a series of power struggles. Perhaps the most important concerned the oil depletion allowance, as members of Congress in 1969 launched new attempts to rein in the costly giveaway. Representative George H. W. Bush was the industry’s Horatio at the bridge — or perhaps its George Wallace. “In an era when civil rights became the great moral issue that galvanized liberals,” observed Bush biographer Herbert S. Parmet, “the targeted oil depletion allowance was not far behind.”

Bush had barely completed his first term in the House. But he had an urgent task. President Nixon was under pressure to support a reduction in the depletion allowance, and some signals were emerging from the administration that he might do just that. Bush, joined by [Texas] Senator Tower, flew to Nixon’s vacation home in California to help save the day. The trip was apparently a success. Nixon affirmed his intention to block the reform efforts. Bush later wrote Nixon’s treasury secretary, David Kennedy, to thank him for reversing an earlier statement hinting that the White House might cave in to popular pressure for reform, adding: “I was also appreciative of your telling how I bled and died for the oil industry.”

The moment passed, but protecting the allowance remained uppermost in the minds of independent oilmen — and Nixon was not proving sufficiently stalwart on the matter. The White House sent political operative Jack Gleason out to West Texas to calm flaring tempers. “[Nixon aide] Harry Dent sent me down to Midland, to the Midland Petroleum Club, to talk to them about the depletion allowance,” Gleason told me in a 2008 interview. Gleason had trouble understanding the complex issue, so he was not clear on precisely what the oilmen were mad about. “Almost got lynched and run out of town . . . It was a very ugly scene. Fortunately one guy . . . saved my ass, or otherwise I’d still be buried somewhere at the Petroleum Club.”…

There would be growing anger in the Pentagon about Nixon and Kissinger’s secret attempts to secure agreements with China and the Soviet Union without consulting the military. And there were the oilmen, who found Nixon wasn’t solid enough on their most basic concerns, such as the oil depletion allowance and oil import quotas….the oil barons were up in arms over threats to the oil depletion allowance, convinced that Nixon was not solidly enough in their corner. But they had other gripes.

As [Nixon aide H.R.] Haldeman noted in a diary entry in December 1969: “Big problem persists on oil import quotas. Have to make some decision, and can’t win. If we do what we should, and what the task force recommends, we’d apparently end up losing at least a couple of senate seats, including George Bush in Texas. Trying to figure out a way to duck the whole thing and shift it to Congress.” …

It turns out that in March 1974, as the effort to oust Nixon continued to mount, Congress and the Nixon administration were making things very uncomfortable for the Bush crowd. There were news reports that federal officials and members of Congress were looking into possible antitrust violations by people who sat simultaneously on multiple oil company boards. In a December 1973 letter responding to members of Congress, an assistant attorney general had confirmed that the Nixon Justice Department was looking at these so-called interlocking directorates.

Most striking about the long list of violators is this: a significant majority of them had been friends of, fund-raisers for, or major donors to George HW Bush. Many had also been employers or sponsors of George de Mohrenschildt [the oilman-spook and longtime friend of HW Bush who served as a kind of mentor to Lee Harvey Oswald.] The list included the son of oil depletion king Clint Murchison Sr.; Admiral Arleigh Burke Jr., who had allied himself with Allen Dulles in post–Bay of Pigs inquiries into the disaster and criticized Kennedy’s handling of the invasion; [Texas military contracting king] George Brown of Brown and Root, backer of LBJ and George HW Bush and employer of Oswald/Bush friend George de Mohrenschildt; Dean McGee, former business partner of the late oil depletion backer Senator Robert Kerr; Toddie Lee Wynne, whose family provided lodging to Marina Oswald after Kennedy’s assassination; oil-military intelligence man Jack Crichton; and Neil Mallon, George HW Bush’s well-connected “uncle,” who ran the Bush family’s oil services firm Dresser Industries (later merged with Halliburton and Brown and Root.]

Who had been investigating these men? Nixon’s Justice Department. It was almost a perfect echo of what was going on in JFK’s final year in office — and in life. Jack Kennedy had been fighting with the same group of independent oilmen over the oil depletion allowance, and Bobby Kennedy’s Justice Department had sent grudging FBI agents into oil company offices to examine their books. Nixon and his old nemesis JFK had both angered the same people, and both had been removed from the presidency….

Robert G. Stone, who ran Harvard University’s board of overseers in the late 80s when it pumped massive investments into the obscure oil company Harken Energy at the time the firm was employing young George W. Bush and bolstering his political and financial fortunes, was a board member and sometime chairman of a whole range of companies involved with international shipping, the use of inland barges to move oil, and oil exploration. At one point he controlled one of the world’s largest cargo fleets. And he was intimately associated with a small circle of highly politicized oilmen whose names have appeared in previous chapters. He served as chairman of the board of the Houston-based Kirby Corporation, a shipping and oil concern substantially controlled by the family of the oil depletion allowance king, Clint Murchison.

How is that for a thumbnail on why the Senate can’t resist the oil industry? Back to the New York Times and the recent, failed effort to cut oil tax breaks:

Energy-state Democrats criticized the initiative, saying it was misdirected and would do nothing to ease gasoline prices and could cost American jobs.

“Why are we harming an industry — five large oil and gas companies that work internationally, that employ 9.2 million people in the United States directly?” asked Senator Mary L. Landrieu, Democrat of Louisiana. “Why are we doing it?”

Republicans, who on Wednesday will push their own plan to open more areas to oil drilling and speed government permits, said the Democratic proposal would contribute to higher prices and increase dependence on foreign oil even though a recent Congressional Research Service report predicted any impact on prices would be negligible.

The above paragraph is a rare Times effort to directly challenge a dubious statement…

…on Tuesday, Senate Democrats wrote to the Federal Trade Commission seeking an inquiry into whether domestic oil refiners had reduced production to drive down the gasoline supply and drive up prices. “This is just another piece of the puzzle that we need to get at as we try to take away taxpayer subsidies to Big Oil and hold Big Oil accountable for whatever may be going on in the supply chain that is hurting the families that I work for,” said Senator Claire McCaskill, Democrat of Missouri.

One wonders if Senator McCaskill really thinks she can hold Big Oil “accountable” — or whether she and her colleagues even understand the background to the current battle.

Members of Congress are so overwhelmed dealing with the here-and-now, the frenetic pace of legislating, raising money and courting voters, that they’re often the last people in the room to have a good grounding in the history that shapes — and often dooms — their efforts.

Related front page panorama photo credit: Adapted by WhoWhatWhy from Pumpjacks (Arne Hückelheim / Wikimedia – CC BY-SA 3.0).


  • Russ Baker

    Russ Baker is Editor-in-Chief of WhoWhatWhy. He is an award-winning investigative journalist who specializes in exploring power dynamics behind major events.

    View all posts

Comments are closed.