The Making of a Tax Break: The Oil Depletion Allowance, Scientific Taxation, and Natural Resources Policy in the Early Twentieth Century

Jimmy Stewart struck oil at 4,180 feet. Tipped off by a geologist in 1949 to prospect around Vernal, Utah, Stewart, along with associates from the nation’s film and airline industries, sank $75,000 into a wildcat well that ultimately produced eight hundred barrels of crude a day. Even before their discovery, these investors had reason for optimism. The same geologist directing them to Vernal had already pointed Frank Sinatra to an oil field in Wyoming. When Sinatra’s well hit oil, he dubbed it “Crooner No. 1.”¹

While Stewart was only beginning his career as an oilman, Gene Autry was already completing his sixth well near Wichita Falls, Texas. This successful strike yielded the “Singing Cowboy” a profitable one thousand barrels a day. Flush with success, he anticipated drilling at least twenty more wells on his land nearby. And Autry was not the only movie star in the Lone Star state. Bob Hope and Bing Crosby pooled their resources and jumped into the oil business together near the town of Snyder. Western lead Randolph Scott operated near Rotan. Not far from either, Don Ameche and friends invested $200,000 into more than 21,000 acres in yet another speculative venture. Of course, not all of Hollywood’s oilmen found success in the oil patch—John Huston, Mervyn Le Roy, and Dennis O’Keefe lost nearly $200,000 of their own in a failed well near Los Angeles. Whether a profitable investment or not, oil fever had returned to Hollywood. “When you see a group of movie people talking on the set,” observed one oil executive, “you don’t know whether they’re discussing an oil well or a movie.”²

In many respects, the oil business resembled Hollywood. Both encouraged investors to risk fortunes on prospects of ever larger rewards. Both attracted flamboyant personalities. Both had roots in southern California, which occasionally, as in this instance, intertwined.³ But as Stewart, Sinatra, Autry, and the others realized, oil offered something that film never could: tax provisions like the depletion allowance that permitted oil producers—and their film industry investors—to shelter their unusually high incomes from taxation. Since 1926, the depletion allowance, or percentage depletion, had permitted investors to deduct from otherwise taxable income 27½ percent of the gross income earned from oil wells. Percentage depletion proved particularly enticing to some of the nation’s most prominent entertainers in 1949 because in the middle of the twentieth century, their hefty incomes faced marginal tax rates in the neighborhood of 80 percent or more.⁴ Experts called this strategic oil investing “drilling with tax money.”⁵

For opponents of corporate privilege, by the time Hollywood was drilling with tax money, the depletion allowance had come to symbolize everything that was wrong with American tax policy. The liberal New Republic editorialized in 1951 that it constituted “perhaps, the most scandalous single grab by Big Business extant.” Erwin Griswold, tax scholar and dean of Harvard Law School questioned whether a different system could avoid “granting enormous tax advantages to drones and others who take little or no risk” and was “puzzled why anyone should think that it has a proper place in a fair and equitable tax system.” Leading public figures were similarly critical. “I know of no loophole in the tax laws so inequitable as the excessive depletion exemptions now enjoyed by oil and mining interests,” wrote Harry Truman in his 1950 tax message to Congress, noting that the system allowed “a few to gain enormous wealth without paying their fair share of taxes.” And indeed, Truman proposed dramatically reducing the depletion allowance, as had Franklin Roosevelt before him and would John F. Kennedy after, along with numerous members of Congress.⁶ And yet, this controversial 27½ percent deduction was hardly the first policy experiment with a special tax deduction for natural resources industries, and when percentage depletion itself was adopted in 1926, it was framed as “in the interest of simplicity and certainty in administration” and widely...