Oil bust helped some of Oklahoma’s largest companies avoid income taxes

Donate
Continental Resources. BRIANNA BAILEY/The Frontier
Oklahoma City-based Continental Resources Inc.’s profits topped $789 million in 2017, but the oil and gas driller will likely pay no corporate income taxes in Oklahoma for years to come — and some of the state’s other biggest companies won’t either.

When crude oil prices crashed between 2014 and 2016, many Oklahoma energy companies booked sizable losses that can be used to reduce or completely eliminate state income tax liability for up to 20 years. This common corporate income tax deduction is called a net operating loss carryforward.

Other large corporations in the state were also able to reduce their income tax liability with the help of a combination state tax credits and net operating loss carryforwards that will allow the companies to pay very little or no corporate income taxes for many years.

By the end of 2017, Continental Resources had amassed tax deductions from net operating loss carryforwards in Oklahoma worth $2.17 billion that won’t begin to expire until 2027, according to regulatory filings.

Corporate income tax collections decline in Oklahoma

Oklahoma corporate income tax collections have sharply declined since the oil bust of 2014.

Low oil prices aren’t the only reason for declining corporate income tax collections. Corporations can use other deductions, tax credits, and incentives to reduce their tax liability. The oil and gas industry likes to point out that Oklahoma has paid out millions of dollars over the past several years in income tax refunds to the wind industry through the Zero Emission Tax Credit.

As of Feb. 7, the state has already paid out $63.3 million in refundable zero emission tax credits for the 2018 fiscal year, according to the Oklahoma Tax Commission.

Many businesses avoid paying corporate income taxes at all by organizing as limited partnerships or other types of entities that don’t have to pay income taxes.

When the price of oil was high, Oklahoma’s corporate income tax collections reached a 10-year peak of $582.7 million for the 2013 fiscal year, according to the Oklahoma Tax Commission. But collections steadily fell over the following four years, declining more than 71 percent to $168.7 million by the 2017 fiscal year.

Jonathan Small, president of the conservative think tank Oklahoma Council of Public Affairs believes the recent swings in fortune for Oklahoma oil and gas companies are just one more reason that Oklahoma should look less volatile sources of revenue than corporate income tax to shore up its finances.

Texas, with its massive oil and gas industry, has no corporate income tax, but instead taxes gross receipts, which has kept state revenues more stable there, Small said.

Oklahoma should look at taxing more goods and services instead of income tax, he said.

“We need comprehensive wholesale tax reform where we stop taxing work and capital and start taxing consumption,” Small said.

But corporate income taxes already make up a relatively small portion of Oklahoma’s revenue—about 4 percent to 6 percent.

Corporations pay a flat income tax rate of 6 percent on taxable income in Oklahoma. The bulk of that money, about 77 percent, goes into the state’s general revenue fund and most of the rest goes into the HB 1017 Education Reform Fund for public schools and the Teachers Retirement Fund.

Like most states, Oklahoma has no cap on the dollar amount on net operating loss carryforwards corporations can amass from unprofitable years.

Matt Gardner, senior fellow for the liberal think tank the Institute on Taxation and Economic Policy, said Oklahoma’s law allowing for corporations to deduct loss for up to 20 years without any limit on the dollar amount are pretty standard, although the federal rules on net operating losses have changed somewhat as part of Trump administration tax reforms.

Like Oklahoma’s oil and gas industry, U.S auto makers continue to reap big tax deductions sustained from massive losses in 2008 that were part of the global financial downturn.

“Oklahoma is doing what most states do right now —i t’s the easiest and most common thing,” Gardner said. “The most obvious problem when you allow companies to use net operating loss carryforward for 20 year is that you get the situation where clearly profitable companies are able to completely zero out their taxes.”

Corporations only pay income taxes when profitable

Corporations only pay income taxes when they turn a profit and many Oklahoma companies sustained multiple years of losses during the energy industry downturn.

Continental Resources booked net losses for two consecutive years following the oil bust of 2014.

“Continental has incurred significant taxable losses due to our high level of investment in drilling and completion activity in Oklahoma, while facing low commodity prices over the last 3 years,” Kristin Thomas, a spokeswoman for the company said in an email.

In 2015 and 2016 Continental Resources reported net losses of $353.7 million and $399.7 million respectively.

Still, Continental Resources continues to pay many other kinds of taxes in the state, even in unprofitable years.

“Due to the severance tax in Oklahoma, even if a profit isn’t made, the oil and gas industry continues to contribute a large portion of the state’s revenue. In addition, as commodity prices improve, significant taxable income will be made,” Thomas said. “It is crucial to understand all taxes paid by the oil and gas industry – not just looking at them individually. Those include gross production, excise tax, property tax, sales and use tax, and employee personal income withholding.”

Devon Energy. BRIANNA BAILEY/The Frontier

Devon Energy had $1.7 billion in total state net operating loss carryforwards at the end of 2017, but it’s unclear from regulatory filings how much of it was from Oklahoma. Devon operates in Oklahoma and three other states as well as Canada.

“As you’re aware, steep declines in oil and natural gas prices that began in 2014 and worsened in 2016 led to a period of serious challenges for companies across the energy industry,” Devon spokesman John Porretto said in a statement. “During these years, Devon suffered significant financial losses and, under Oklahoma state tax law, paid no corporate income tax in 2017.”

Devon’s total effective income tax rate was negative 20 percent in 2017, according to regulatory filings.

The company reported net losses attributable to Devon of $14.4 billion in 2015 and at $3.3 billion in 2016.

Like other oil and gas companies, Devon is quick to point out that it still paid millions of dollars in other kinds of taxes in Oklahoma besides income taxes.

Devon paid about $350 million in various taxes to the state of Oklahoma in the between 2013 and 2017, averaging nearly $70 million per year in taxes other than corporate income, Porretto said.

“According to the State Chamber, Oklahoma’s oil and gas firms face a relative tax burden that is four times greater than the average business in the state on a per-worker basis,” he said.

Chesapeake Energy Corp. BRIANNA BAILEY/The Frontier

Chesapeake Energy Corp. reported that it had combined state net operating loss carryforwards of about $10 billion at the end of 2017 that will begin to expire between 2031 and 2037. The company operates in at least six states and it’s unclear how much of these billions in tax deductions were generated in Oklahoma.

The company did not respond to The Frontier’s questions about Oklahoma corporate income taxes.

Chesapeake booked a net loss of more than $14 billion in 2015 alone due to low commodities prices.

Wind farms, merger help other Oklahoma companies help reduce income tax liability

Some of Oklahoma’s other large corporations have avoided paying income taxes for reasons other than low oil prices.

Oklahoma City-based OGE Energy Corp.’s main business segments are its electric utility subsidiary OG&E and natural gas transmission processing and storage.

However, OGE has been able to generate large net operating loss carryforwards by building several wind farms in Oklahoma. The company also has accumulated millions in various state tax credits to further shield it from corporate income taxes in Oklahoma.

Brian Alford, a spokesman for OGE, said in an email that the company made big investments in wind farm projects over the past decade, when federal law allowed for generous tax deductions for investing in renewable energy projects.

Oklahoma law also allowed for tax deductions for building the wind farms.

“In our case, the federal deductions related to renewable investments created net operating losses in Oklahoma,” Alford said in an email.

According to regulatory filings, OGE had about $472 million in state net operating loss carryforwards, as well as about $176 million in various Oklahoma state tax credits, primarily in Oklahoma investment tax credits.

“Through the combination of net operating losses carried forward and state tax credits, OG&E’s state tax bill has been effectively lowered, resulting in little or no state tax payment,” Alford said. “This will likely be the case for several more years barring a change in state tax policy.”

Tulsa-based natural gas services provider ONEOK Inc. will likely not pay any cash income taxes through 2021—one of the perks of its 2017 merger with the pipeline company ONEOK Partners LP.

As a master limited partnership, ONEOK Partners paid no corporate income taxes before the merger.

ONEOK Inc. had about $73 million in state tax benefits from net operating losses on the books at the end of 2017 from multiple states, according to regulatory filings.

The company paid no state income taxes in Oklahoma in 2017, ONEOK spokesman Brad Borror said.

As for Continental Resources, $713.7 million of company’s 2017 profit—nearly 85 percent—was from the Trump administration’s federal tax reform.

During a conference call with analysts in February, Continental Resources Chairman and CEO Harold Hamm said 2018 was shaping up to be a profitable, “breakout” year for the company.

“We have clearly entered a new era in Continental’s history and we are strategically positioned to operate at a high level for many years to come,” Hamm said.

Your financial support for our investigative journalism is now tax deductible. To become a Friend of The Frontier, click here.

Brianna Bailey

Brianna Bailey grew up in Idaho. Oklahoma is her adopted home. Bailey has covered issues ranging from Oklahoma's strained child welfare system to the slow decline of Oklahoma's rural hospitals. She has walked all the way across Oklahoma City twice, once north-to south via Western Avenue and once via the old U.S. Route 66. Her hobbies are baking and crashing meetings she isn't invited to attend. She holds a bachelor's degree in journalism from The University of Oklahoma. Email her at brianna@readfrontier.com
Donate