Fairness, Job Creation, Energy Security…and a New Study

Mary Schaper
Posted July 11, 2013

From time to time, a few politicians get the not-so-bright idea to try to repeal the tax deduction for intangible drilling cost (IDCs). A new study out today from Wood Mackenzie shows what would happen if this cost recovery measure was repealed effective January 1, 2014.

During a conference call with reporters, API’s director of tax and accounting policy Stephen Comstock noted that IDC expenses including wages, fuel, and hauling costs typically represent 70 to 90 percent of the cost of a completed well. Comstock: 

“In simple terms, IDCs are operating costs for oil and natural gas drilling. And just like every business in America, oil and natural gas companies are allowed to deduct operating costs when calculating their federal income tax liability.”

According to Wood Mackenzie, the effects would be significant and immediate. The industry would be forced to make fewer investments, drill fewer wells, employ fewer Americans, and produce less of the energy that fuels our economy.

Highlights from the analysis – if the IDC deduction is repealed:

• An additional 190,000 Americans would be unemployed in 2014 – the equivalent to taking away an entire month of job creation at current growth rates
• A drop in employment of 265,000 jobs in the year 2023
• On average, 225,000 jobs lost per year over the ten year period
• Employment directly in the oil and natural gas industry would be reduced by an average of 65,000 jobs per year, reaching 75,000 jobs in 2023
• Projected industry investment in the U.S. falls by $407 billion over the ten year period
• By 2023, nearly 10,000 wells will not be drilled; the result is a significant decline in future U.S. energy supply with oil and natural gas production in 2023 coming in 14 percent below current expectations

Back to Comstock:

“For five years now, President Obama’s budget and legislative proposals have sought to repeal the ability to deduct intangible drilling costs while keeping similar cost recovery measures in place for all kinds of other businesses. Bipartisan efforts to actually accelerate cost recovery in other sectors of the economy have become almost routine.”

Despite these facts, the current administration continues to incorrectly refer to the IDC deduction as a “subsidy,” spreading that false notion that this provision is somehow unique to oil and natural gas. 

Tax reform has also been a hot topic this year.  Recently, Senators Max Baucus and Orrin Hatch announced an approach to tax reform that would start with the elimination of all tax provisions except those that “help grow the economy, make the tax code fairer, or effectively promote other important policy objectives.” Comstock again:

“The IDC deduction meets all three criteria. We just discussed the economic impact. The question of fairness is also clear. When every other company in America can deduct operating costs, it would not be fair to single out one industry for worse treatment. And few policy objectives could be more important than improving America’s energy security by cutting our reliance on energy from more volatile parts of the world.”

If policymakers want to generate more revenue from oil and natural gas production, raising taxes is the wrong approach. They should instead take actions that help increase the amount of energy we produce here in America. A forward-looking program to expand opportunities for domestic oil and natural gas development could create more than a million new American jobs and generate hundreds of billions of additional dollars for the government.