Studies have shown that the below tax increases would discourage oil and natural gas production, lead to fewer well-paying American jobs, increase our reliance on foreign imports and potentially contribute to higher energy costs for consumers. Further, the below tax provisions 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.
America’s oil and natural gas industry already returns more than $85 million to the federal Treasury every day, pays taxes at far higher effective rates than most other industries, and is one of the few industries that created jobs throughout the economic downturn. Increasing the industry’s taxes would push oil and natural gas investment elsewhere, diminish job-creation and stifle 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.
Below are some of the key tax issues API is engaging with lawmakers on.
Repeal Expensing of Intangible Drilling Costs (IDCs)
- Full study: Impact of IDC Repeal: How repeal of Intangible Drilling Costs (IDCs) will affect US onshore/offshore energy development and the economy
API has created one-pagers to help decision makers understand how the repeal of Intangible Drilling Costs (IDCs) will affect the various regions of US onshore/offshore energy development and the economy. See the below documents for details:
- PDF: Impact of IDC Repeal - North American
- PDF: Impact of IDC Repeal - Rocky Mountains
- PDF: Impact of IDC Repeal - Mid-Continent
- PDF: Impact of IDC Repeal - Gulf Coast
- PDF: Impact of IDC Repeal - Permian
- PDF: Impact of IDC Repeal - Northeast
Taxpayers have had the option to deduct certain operating costs 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.
- PDF: Why Eliminating the IDC Deduction Hurts the Economy
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 below for a comparison of IDC to research and experimental deductions for other industries.
- PDF: Comparison of IDC Deduction and Research & Experimental Deduction
Targeted Repeal of Section 199 for Oil and Natural Gas Companies
The Section 199 tax 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 (and only this industry) is limited in claiming the deduction to an amount that is a third less than all other US manufacturers. 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.
- PDF: Repealing the Section 199 Manufacturing Deduction for Oil and Natural Gas Companies Puts Jobs at Risk
Modification of the Foreign Tax Credit (aka Dual Capacity)
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 are not addressing any real concern or problem and in fact they possibly result in U.S. job losses and decreased competitiveness.
- PDF: Modifying Dual Capacity Taxpayer Rules Leads to Double Taxation of US Companies
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.
- PDF: Repealing LIFO Accounting Will Stifle US Job Creation and American Energy Production
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.
- PDF: The Current Tax Treatment of G&G Supports Domestic Energy Production
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.
- PDF: Reinstating Superfund Taxes is Not Sound Policy
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.
- PDF: IPAA's Repeal Percentage Depletion