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ferent oil and gas properties are derived by computing the required profitability on new investments, given the tax laws and an assumed after-tax discount rate. Our analysis shows that oil and gas extraction is taxed more favorably than most other business activities under both current law and the law in effect prior to the Tax Reform Act of 1986 (TRA). The effective tax rate on oil and gas investments is very sensitive to characteristics of the property and of the company developing it, but it is lower than effective tax rates on other industries in all the cases we examined. The low effective tax rates on oil and gas properties result from favorable rules for recovery of capital costs. These include expensing of most intangible drilling costs and five-year recovery of the non-expensed portion; expensing of dry holes and abandoned properties; and, for non-integrated producers, percentage depletion.2 The benefits of favorable capital recovery rules are reduced to some degree by provisions of the alternative minimum taxes