Posted April 11, 2013
Let’s dig into the details of the more than $90 billion (over 10 years) in new and targeted tax increases on America’s oil and natural gas companies that President Obama included in his FY2014 budget. Note: The tax provisions below are in no way “taxpayer subsidies” and are not unique to our industry. They constitute standard business deductions (some available to all other industries) and mechanisms of cost recovery – a fundamental and necessary component to a national income tax system. Here we go:
Repeal expensing of Intangible Drilling Costs ($11 billion) – When companies drill they incur intangible drilling costs (IDC) – costs that cannot be recovered, such as site preparation and labor, representing 60 to 80 percent of the cost of the well. Since 1913, companies have been able to expense these costs, much like the Research & Development deduction enjoyed by other industries. Cost recovery is an essential part of all business models and IDC, just like R&D, serves identical policy goals: innovation, development and growth. Eliminating the IDC deduction would discourage innovation in the energy sector, jeopardizing additional valuable advances in oil and gas exploration, high paying jobs and America’s energy security.
Targeted repeal of Section 199 – only for oil and natural gas ($17.4 billion) – This deduction was established in 2004 as part of the “American Jobs Creation Act” to help U.S. manufacturers maintain and create well-paying U.S. jobs. This deduction is available to all qualifying income from all domestic manufacturers at 9 percent; however the oil and natural gas industry already is penalized at only 6 percent. Repealing this deduction for just the oil and gas industry (rather than all taxpayers), places hundreds of thousands of jobs at risk and undermines efforts to reduce our dependence on imports.
Modifications of Dual Capacity rule ($11 billion) – The budget’s international provisions include a proposal to modify rules for dual capacity taxpayers. This modification will subject only U.S.-based companies to double taxation on income earned overseas and greatly impact both foreign and domestic investment. Studies indicate U.S.-based oil and natural gas companies will be significantly restricted from growing and expanding in the world marketplace – costing U.S. revenues and U.S. jobs that support overseas operations.
Repeal of LIFO ($28.3 billion) – The figure here, the estimated oil and natural gas share of the total OMB FY2013 budget score, is assigned to repeal of the “last-in, first-out” or LIFO accounting method. It is not a “gimmick” or tax loophole. It is a well-established way to determine book and taxable income for companies that anticipate inflation or rising prices over the course of their operations. It is used by many industries. Repealing LIFO would require companies to redirect cash or sell assets to cover the tax payment – potentially destroying some businesses.
Increase G&G amortization period ($1.4 billion) – Geological and geophysical costs are costs that are expensed while using technology to explore for recoverable oil and natural gas deposits – that may or may not be found. Efforts to locate oil and natural gas reserves in the U.S. can be expensive, and recovering those costs for tax purposes is important to keeping domestic oil and natural gas production strong. Increasing the amortization period for these exploration costs undermines that effort and jeopardizes the goal of reducing our dependence on imports.
Reinstate Superfund taxes ($10.1 billion) – This figure, again, is the estimated oil and natural gas share of the total OMB FY2013 budget score for a proposal to reinstate Superfund taxes. This would unfairly impose additional taxes on crude oil and petroleum products. These products do not account for a substantial portion of the Superfund liability, yet they would be responsible for most of the taxes. Accordingly, such taxes are unfair and do not ensure that remediation or cleanup will happen sooner.
Repeal of Percentage Depletion ($10.7 billion) – For more than a century small mineral right owners have been able to use the percentage depletion provision to avoid the complexity associated with recovering their investment costs as the underlying mineral is produced. Requiring cost depletion will add costs and confusion to individual taxpayers and small companies.
Repeal deduction for Tertiary Injectants ($107 million) – Similar to IDC, this is simply a cost-recovery provision. Changing the way these costs are recovered could force producers to shut in older fields and significantly impact local economies. In addition, this deduction supports the use of carbon dioxide in enhanced oil recovery projects – one of the primary methods by which carbon dioxide is stored to prevent its release into the atmosphere.
These tax increases are the wrong choice for America – in terms of revenue generation for government, jobs and energy. Studies have shown that these tax increases would discourage oil and natural gas production, lead to fewer well-paying American jobs, increase our reliance on imports and potentially contribute to higher energy costs for consumers. Americans agree, with 74 percent in recent national polling opposing increased taxes on the industry. API President and CEO Jack Gerard:
“The president’s 2014 budget plan returns to the well of bad ideas and backtracks on his State of the Union commitment. Instead of advancing constructive pro-development policies, his budget plan calls for increased taxes on America’s oil and natural gas industry. Increasing our taxes would push oil and natural gas investment overseas and diminish job-creation and economic activity here at home. After a handful of years, we would see less domestic energy production – particularly of natural gas – more imports, fewer new jobs, and, eventually, depressed tax, royalty and other revenues. … If the industry’s job-creating investments are a stimulus for the nation, then what the administration is proposing is an anti-stimulus.”
The right choice is to let America’s oil and natural gas companies do what they do well – discover and deliver energy for the American people. A pro-energy development course would generate far more revenue for government than one that includes the discriminatory tax increases detailed above. In addition, increased domestic oil and natural gas production from greater access and common-sense regulatory policies would spur job creation and economic growth. Gerard:
“The administration should be trying to replicate the success America’s oil and natural gas industry has had in creating jobs and growing the economy primarily through development on private and state lands. The evidence clearly shows that what we’re doing is working.”
ABOUT THE AUTHOR
Stephen started with API over 8 years ago and currently manages tax and accounting policy issues for the organization. Prior to joining API, Stephen worked for 12 years in ExxonMobil’s Tax Department as a planner for their Upstream, Downstream and Chemical operations. He is currently Chair of the Energy and Environmental Taxes Committee of the American Bar Association’s Tax Section. Stephen received a BA from the University of Texas and a JD from the National Law Center at George Washington University.