The People of America's Oil and Natural Gas Indusry

Taxing Domestic Production

Mark Green

Mark Green
Posted May 11, 2011

OK, so the administration is targeting tax code provisions that historically have encouraged domestic oil and natural gas exploration and development. The idea is to eliminate certain deductions currently allowed to energy companies and other industries - although the administration's only talking about ending them for oil and natural gas - and direct $4 billion to other purposes.

While the administration argues more taxes are needed because of higher gasoline prices, there's simply no economic connection between the two. "Raising taxes on oil and natural gas companies - or even a handful of the biggest U.S. energy companies - won't reduce gasoline prices," API President and CEO Jack Gerard told reporters recently. So why do it? Politico Pro's Morning Energy explains (subscription): "Democrats hope that just by pushing the bill, they can shift the public's attention away from White House drilling policies."

How do Americans feel about this? Take a listen:

An earlier post focused on one of the administration's targets - the deduction for intangible drilling costs. Another provision the administration wants to end is the Section 199 manufacturing deduction, effectively raising taxes more than $18 billion over 10 years. It's reportedly included in legislation Senate Democratic leaders are unveiling.

Section 199 was created in 2004 to help retain manufacturing and promote creation of well-paying U.S. jobs. It's a deduction equal to a percentage of manufacturers' net income from qualified domestic production.

For most U.S. manufacturing companies, the deduction is 9 percent and is approximately equal to a 3-percentage-point reduction in the corporate income tax rate (35 percent to 32 percent). Again, that's for qualified income from U.S. activities.

The exception is the oil and gas industry, whose Section 199 deduction recently was frozen at 6 percent. And now the administration wants to do away with it altogether for oil and natural gas.

There's a pattern here. The administration wants to take tax deductions, widely available to U.S. businesses, and eliminate them only for oil and natural gas companies. Ending Section 199, just like eliminating other tax treatments, essentially is a tax increase that will not help produce more energy or create new jobs. In fact, a study by the energy research firm Wood Mackenzie suggests repealing Section 199 and other provisions will hurt jobs, thousands of them, in oil and natural gas.

For more information on the tax ramifications in the administration's budget proposals click here. For additional detail on the Section 199 manufacturing deduction click here. For an explanation on why oil and natural gas tax treatments aren't subsidies click here.

Additional Resource:

API research on taxes

ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.