API believes it will take all forms of energy to promote our economy. That’s why API and our members support the development of renewable and alternative sources of energy. However, we it must be done as part of a comprehensive energy policy that encourages the development of all forms of domestic energy. Unfortunately, some policy makers wish to spur other energy industries at the expense of higher taxes on the oil and gas industry. Doing so does not support domestic job creation or help America compete on a global level.
These new taxes could mean less U.S. energy production, fewer American jobs and less revenue at a time when we desperately need all three. More taxes also could reduce our nation’s energy security by discouraging new investment in domestic oil and natural gas production and refining capacity and pushing those investments – and American jobs – abroad. These tax proposals may also decrease America’s role in the global competition for energy and increase our reliance on imported oil and natural gas.
Increasing taxes on the oil and gas industry could personally affect every individual shareholder in these companies or anyone with mutual fund investments, a retirement plan such as a 401K or Individual Retirement Account. The companies in the oil and gas industry cannot be viewed as entities entirely separate from the rest of the economy and society. What happens to the industry affects all Americans: Congress and the Administration should not lose sight of this very important fact.
Repeal Sec. 199 for Oil and Natural Gas Companies
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%; however the oil and natural gas industry is already penalized at only 6%. A full repeal of 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 foreign oil. For a broad overview, see Repeal Sec. 199 for Oil and Natural Gas Companies. For a more detailed analysis of the potential negative impact of this proposal, see Repealing the Section 199 Manufacturing Deduction for Oil and Gas Companies Puts Jobs at Risk.
Repeal Expensing of Intangible Drilling Costs
Taxpayers have had the option to expense IDC since the inception of the Tax Code. It has helped companies continue exploring for and producing oil and gas. Repealing this deduction will significantly raise the cost of drilling and development in the U.S. and result in less revenue to the government, fewer U.S. jobs and greater dependence on foreign energy sources. For a broad overview, see Repeal Expensing of Intangible Drilling Costs. For a more detailed analysis of the potential negative impact of this proposal, see Eliminating the Ability to Expense Intangible Drilling and Development Costs Will Hurt Our Energy Security.
Additionally, these deductions have played a crucial role in advances in technology and spurring transformations in the US economy and America’s energy sector. Similar to the research and development costs for other industries, the intangible drilling and development cost deductions for oil and gas companies have identical policy goals: to promote innovation, foster development of new products and resources, and promote economic growth. See Why Eliminating the IDC Deduction is Bad Tax Policy for a comparison of IDC to R&D for other industries.
International Reform/Dual Capacity
Proposals to restrict the use of deductions and foreign tax credits on foreign earnings do not recognize the multinational nature of the U.S. economy. They penalize industries that must seek foreign markets to grow - like the oil and gas industry. Efforts to subject the oil and natural gas industry to double taxation of its foreign earnings will hinder the ability of U.S. based companies to expand in the world marketplace. Contrary to statements made by the Administration, these proposals will not create U.S. jobs and could even result in U.S. job losses. For a broad overview, see Raising Foreign Income Taxes. For a more detailed analysis of the potential negative impact of this proposal, see Losing Our Edge – How Current Attempts to Double Tax Profits Will Cost American Jobs and Decrease International Competition.
Increase G&G Amortization Period
Geological and geophysical costs are those expensed in the process of using technology to locate what companies hope will be recoverable oil and natural gas deposits – however, there is no certainty. Efforts to find oil and gas reserves in the U.S. can be very expensive and recovering those costs for tax purposes is important to keeping domestic oil and gas production strong. Increasing the amortization period for these exploration costs undermines that effort and jeopardizes the goal of reducing our dependence on foreign oil reserves. Click here to learn more.
Repeal LIFO
The “last-in, first-out” or LIFO accounting method 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 used by many industries. Repealing LIFO would require companies to redirect cash or sell assets in order to cover the tax payment – potentially destroying some businesses. Further, simply targeting just one industry is nothing more than a punitive political attack. Click here to learn more.
Raising the Oil Spill Tax
API member companies understand the need to adequately fund the Oil Spill Trust Fund. However, recent legislative proposals have sought to use this fund as a resource to pay for special interest projects and other non-Oil Spill Trust Fund spending. This effort unfairly imposes a tax on the oil and gas industry and its’ consumers under the guise of addressing a need that is not really there.
Repeal Expensing of Tertiary Injectants
Similar to IDC, this is simply a cost recovery provision. Changing how these costs are recovered could force producers to shut in older fields and significantly impact local economies. In addition, this deduction supports using 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.
Reinstate Superfund Taxes
The proposal to reinstate Superfund taxes would impose additional taxes on crude oil and petroleum products unfairly. See this document for more information.
Repeal Percentage Depletion
For over a century small mineral right owners have been able to avoid the complexity associated with recovering their investment costs as the underlying mineral is produced by using percentage depletion. Requiring cost depletion will add costs and confusion to individual taxpayers and small companies. For more information, see IPAA's Repeal Percentage Depletion.
Repeal EOR Credit and Marginal Well Credit
These tax credits were established to ensure continued production when prices are low. However, currently (as of Feb. 2012), these credits are phased out and are not currently being used by the industry. For more information, click here.