Sensitivity of Rates of Return and Output to Alternative Tax Scenarios: The Case of the U.S. Gulf of Mexico OCS

Income derived from crude oil and natural gas production has generally received differential tax treatment relative to that of other industries, thus violating the economic concept of tax neutrality. From the inception of the corporate income tax in 1913 and for over a half century thereafter, this tax treatment was distinctly preferential. In particular, the percentage depletion allowance and various expensing options available to the industry provided tax advantages relative to other industries. Since 1969, integrated oil and gas producers have seen the reduction and eventual elimination of the percentage depletion allowance, some tightening of the expensing of intangible drilling costs, and the imposition of the Windfall Profits Tax of 1980. The authors first review the pre-1969 preferential tax treatment and the post-1969 nonpreferential tax treatment received by oil and gas producers large enough to operate in the Outer Continental Shelf (OCS). This followed by an empirical analysis of the collective impact on the rate of return on lease investment from taxes in general and several of the tax provisions individually. This empirical analysis is accompanied by qualitative theoretical statements indicating the effect on oil and gas production associated with each tax measure. The federal OCS oil and gas leases issued between 1954 and 1969 form the basis for the empirical analysis. 23 references, 1 table.