Depletion is the exhaustion of natural resources, such as oil wells. Big Oil Corps get a US federal income tax deduction for their depletion.
Many years ago, the US Congress passed tax legislation that allowed Big Oil Corps to compute their depletion federal income tax deduction in two ways, either by Cost Depletion or by Percentage Depletion.
Cost Depletion is similar to computing Depreciation under the units of production method.
Percentage Depletion is computed as a percentage of the gross income from the oil well in each year.
And in a bizarre twist, Congress also let Big Oil Corps deduct percentage depletion in a year in which it is higher than cost depletion. However, when the higher percentage depletion is claimed in a given year, the tax basis of the oil well doesn’t get reduced by the percentage depletion actually claimed, but rather by the lower Cost Depletion that wasn’t claimed in that year.
Therefore, Big Oil Corps are allowed to deduct, in total over the life of the well, substantially more than the cost of the oil well.
Obviously this is a corporate tax loophole, and a pretty abusive one. But yet, the US Congress has never had the courage to close this Big Oil corporate tax loophole, because so many in Congress are in the pockets of Big Oil, and also many of them are also scared to death of Big Oil, because of its awesome power.
My proposal here is to kill Percentage Depletion for Big Oil Corps for all years from 2011 and forward.
The money raised here will all be used to reduce the US Deficit.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
