The US oil and gas industry is a veritable “cash cow” for the Government, having resulted in almost USD 2 trillion in tax revenues since 1981. The figure was released on June 28th, in a new report published by the Tax Foundation, an independent body monitoring fiscal federal policy in the US. The new report, which used data from the Energy Information Administration, shows that in 23 of the last 27 years the US Government tax revenues arising from the oil industry were higher than cumulative sector’s profit in the corresponding years.

Throughout the 27 surveyed years in the report, collection of excise tax alone on oil products reached USD 1.1 trillion. Corporate Income Tax paid during the same time reached a cumulative amount of USD 388 billion. Severance taxes, property taxes and the short-lived Windfall Profits Tax scheme garnered an approximate USD 472 billion for the Government. All told, net Government collections exceed overall industry profits by almost 40 percent, with a total collection of USD 1.954 trillion. Further, between 1981 and 2008 oil and gas exploration and extraction companies paid an additional USD 683 billion in income taxes to foreign Governments.

In the face of the recent losses and damages caused by the BP oil spill disaster and the exuberant tax breaks received by the oil sector, it is understandable that politicians are reverently calling for reconsideration of the tax treatment of the oil industry. However, care must be taken that any action taken will not upset the balance which has made the oil sector one of the US’s biggest tax payers for 28 years. Scott Hodge, President of the Tax Foundation, added that the Government is “addicted” to the levels of oil tax profits it currently derives, and if attempts are made to change tax treatment of the oil and gas industry companies then politicians should be honest about the exorbitant tax profits collected from oil activities.

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To stem the potential influx of US charities losing their tax-exempt status this year, the Internal Revenue Service (IRS) has announced an extension to the tax filing deadline for not-for-profit organization. Under the one-time relief program, announced on July 26th, charities will now have until October 15th 2010 to complete necessary returns and declarations. The exemption is being offered after repeated calls from tax preparers with claims that more time is needed to adequately fulfill all necessary documentation requirements. The filing date for tax-exempt organizations is based on the entity’s own accounting period, with the deadline for most charities falling between May 17th and early October. The filing extension has not been offered to large charities, with annual gross receipts in excess of USD 500 000 and assets of more than USD 1.25 million.

Under the Pension Protection Act of 2006, charities are liable to lose their tax-exempt status if necessary returns are not filed for three years. The 2010 year will be the first in which the new rules will be enforced, and non-compliance will lead to organizations losing their status in early 2011. Current IRS records indicate that 321 091 non-profit entities are at risk of forgoing their tax exemption.

Tax-exempt charities provide an invaluable set of services to US communities, which would typically fall outside the scope of Federal or local Government spending. Explaining the need to for charities, Doug Shulman, IRS Commissioner, said that they “are vital to the vibrancy of our nation.” He went on to say, “The last thing we at the IRS want to do is to have these groups lose their tax-exempt status because they haven’t filed a short, simple form.”

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On July 13th the Nelson A. Rockerfeller Institute of Government released its latest State Revenue Report. The publication showed that state’s overall tax revenues experienced a 2.5 percent increase in the first quarter of 2010, compared to the same period last year, although despite the improvement, collections were still down by 9.3 percent, compared to the pre-recession levels of two years ago.

The total improvement in tax revenues consisted of rises in collections of Personal Income Tax (2.5 percent), General Sales Tax (0.6 percent), and a fall in collections of Corporate Income Tax (0.4 percent). However, the positive movement is a result of total revenue increases from only 17 states: Connecticut, Maine, Massachusetts, Rhode Island, New Jersey, New York, Michigan, Minnesota, North Dakota, Arkansas, Kentucky, North Carolina, Tennessee, Alaska, California, Hawaii, and Oregon. Of the all the states reporting rises, Alaska showed the highest year-on-year improvement, with total tax collection growth of 261.2 percent and 485.7 percent hike in Corporate Income Tax collection. North Dakota and Hawaii were the next highest, with levels of 32.7 percent and 21.4 percent respectively.

Wyoming experienced the most significant cumulative tax collection fall, at 30.2 percent, followed by Louisiana at 24.6 percent. At the same time, Colorado reported an astounding 1846.8 percent decrease in Corporate Income Tax collection.

According to economic analysts, the cumulative national tax revenue increase does not necessarily signal an economic recovery for the US, as many states are still financially fragile and reporting significant losses. Further, tax revenue increases in many states are due to hikes in state tax rates, as opposed to economic pickups. The overall positive national figures are caused by a handful of standout collection increases across a small number of states. Drawing an example, the report stated that excluding California and New York from the national personal income tax collection calculation would decrease the figure from 2.5 percent to negative 8.4 percent.

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On July 12th the US Treasury Department released preliminary results of the Government’s HIRE Act of 2010. According to estimates (on the date of publishing), 4.5 million long-term unemployed US citizens have attained work during the first four month of the program, potentially savings their employers billions in payroll taxes.

Under the HIRE Act, employers paying wages to newly-hired taxpayers between March 19th 2010 and December 31st 2010 are eligible for an exemption to the 6.2 percent contribution towards Social Security payroll taxes. An additional tax credit of USD 1000 will also be granted to the employer for every employee who is retained for longer than 52 weeks. The HIRE Act only applies to new employees who have previously been out-of-work in excess of 60 days.

According to US Treasury estimates, if every employee applicable for the HIRE Act is retained for a period of at least a year, employers will experience a cumulative USD 5.1 billion reduction in payroll tax obligations. However, by applying their commonly observed staff turnover rate, the Treasury estimates a tax saving of approximately USD 3.4 billion. The figure rises to USD 8.5 billion when the USD 1000 tax credit is considered. The estimates are expected to rise further during the year as the HIRE Act will continue to apply for the remainder of 2010.

The latest figures have sparked a fresh round of support for the tax incentive. Charles Schumer, Senator for New York and one of the original authors of the Act, has already begun weighing up a six months extension to the system. Some critics of the HIRE Act have outspokenly claimed that there is no way to gauge the effectiveness of the scheme and its direct impact on unemployment. However, economic analysts have pointed out that the average unemployment period for those falling under the HIRE Act is 10 months, indicating its effectiveness.

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On June 7th the independent US think-tank Tax Foundation released The Economic Effects of the Lower Tax Rate on Dividends, a special report which analyzes the double-level of taxation on corporate profits in the US. According to the report, equity-financed investment profits in the US are taxed under corporate income tax and, subsequently, under personal income tax when profits are distributed as dividend payments. In 2011 the cumulative tax liability on corporate profits will increase to 67.6 percent, exceeding rates levied across all the OECD and G7 member nations.

The double-taxation “problem” is currently partially addressed by the Jobs and Growth Tax Relief Reconciliation Act of 2003. Although the Act will expire at the end of 2010, effectively raising the capital gains tax rate from 20 percent to a rate of 39.6 percent. The hike will be compounded by the introduction of a 3.8 percent Medicare Tax levy and a 1.05 percent to the individual-level State Dividend Tax Rate.

According to the report, the high level of double-taxation on corporate profits leads to a investment imbalance whereby productive corporate investments are unjustly considered inferior to other forms of investments. The tax burden also reduces to overall national levels capital formation and aggregate investment. The tax bias against equity-capital also leads to an over-reliance on debt financing, leading to inherently higher risks of corporate bankruptcy. The report summarized the situation, saying, “…by injecting tax considerations into investment decisions, the double tax reduces the productive capacity of the U.S. economy and serves, ultimately, to reduce the living standards of U.S. citizens.”

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