The American oil and gas industry agrees with President Obama that we need to encourage the development of renewable and alternative sources of energy. However, we strongly believe that it should be done as part of a comprehensive energy policy that encourages the development of all forms of domestic energy. Under the most optimistic projections of future energy use by the Department of Energy, the United States will continue to rely on fossil fuels for decades. Unfortunately, the President’s Fiscal Year 2010 budget proposals are not a formula for energy independence/security.
The President’s budget submission makes a huge tax hit on the oil and natural gas industry: when counting the industry’s possible share of the more general revenue raisers (LIFO, Superfund tax, etc.) and adding that to the industryspecific hits (Section 199, IDC’s, etc.), the total will likely exceed $80 billion over ten years. With America in the midst of an economic recession, now is not the time to impose new taxes on the nation’s oil and natural gas industry.
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 lead to weaker American oil companies in the global competition for energy and greater reliance on foreign 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.
The specific tax items included in the administration’s FY 2010 budget that potentially impact the industry are as follows:
Levy Excise Tax on Gulf of Mexico Oil and Gas Production - Additional taxes on offshore U.S. production will certainly raise money in the short run, but cost money in the long run. Increasing the cost of developing U.S. resources will force investment overseas and limit interest in producing domestic reserves - which generate royalty, bonus and tax income to the government. For more information,
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 more information,
Repeal Sec. 199 for Oil and Natural Gas Companies - This deduction was established to help U.S. manufacturers maintain and create wellpaying U.S. jobs. The oil and natural gas industry provides or supports almost 6 million of those jobs. A full repeal of this deduction for just the oil and gas industry places a number of those jobs at risk and undermines efforts to reduce our dependence on foreign oil. For more information,
Increase G&G Amortization Period - 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. 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,
Repeal Expensing of Tertiary Injectants - The U.S. is a mature oil producing region but still contains many viable fields whose lives are extended through the use of tertiary injectants. These efforts secure additional U.S. production and enable many production companies to remain in business. Changing how these costs are recovered could force producers to shut in older fields and significantly impact local economies. This deduction supports using carbon dioxide in enhanced oil recovery projects, one of the primary methods by which carbon dioxide is currently stored to prevent its release into the atmosphere.
Repeal Passive Loss Exception for Working Interests - Many individual mineral interest owners incur significant expenses associated with developing an oil and gas reservoir. These are losses associated with actively participating in a business endeavor. Limiting the ability to take such losses against other income is unfair and does not recognize the true economic impact of their endeavors.
Repeal EOR Credit and Marginal Well Credit - These tax credits were established to ensure continued production when prices are low. Accordingly, there is a builtin mechanism to phase out the credit when prices increase. Eliminating these credits would disregard the cyclical nature of oil prices and penalize marginal or tertiary production when prices are depressed and domestic production (as opposed to imports) is still needed. For more information, and
Reinstate Superfund Taxes - The proposal to reinstate Superfund taxes would impose additional taxes on crude oil and petroleum products unfairly. These products do not account for a substantial portion of the Superfund liability, yet would be responsible for most of the taxes. Accordingly, such taxes are unfair and do not ensure that remediation or cleanup will happen sooner. For more information,
Repeal LIFO - The LIFO accounting method is not a “gimmick” or tax loophole. It is a wellestablished way to determine book and taxable income for companies that anticipate inflation or rising prices over the course of their operations. Repealing LIFO would require companies to redirect cash or sell assets in order to cover the tax payment – potentially destroying some businesses. For more information,
International Enforcement, Reform Deferral and Other Tax Reform Policies - 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 a host of activities to current U.S. tax 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 more information,
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