ETR 128 More Taxes Mean Less Revenue
Jane Van Ryan
Posted March 15, 2011
In today's episode, I interview Brian Johnson, API's senior tax policy advisor, about the potential impact of the administration's energy tax proposals on the economy, U.S. jobs, and government revenues.
Use the audio player below to listen to information about the article and follow along with the show notes. I hope you find the podcast informative.
00:17 Once again, the administration is proposing to raise taxes on the oil and natural gas industry. The President mentioned it in his State of the Union speech in January when he said he hoped to eliminate incentives that encourage the production of domestic oil and natural gas. But is that a wise move for America? Brian Johnson of API, who is very knowledgeable on tax issues, is in the studio to share his insights.
00:48 What precisely is this administration proposing?
00:51 Mr. Johnson: This budget is similar to previous budgets the administration has proposed. They are essentially trying to raise taxes on America's oil and natural gas industry in a variety of ways. The President said in his State of the Union [speech] that he wants to "eliminate taxpayer subsidies" for the oil and natural gas industry. I find that very interesting because I'm not aware of one taxpayer subsidy the oil and natural gas industry receives. He is proposing to repeal, modify and outright eliminate many of these provisions that allow us to function, to employ millions of people, and give a lot of revenue back to the American government.
01:31 What would these potential tax increases cost the industry?
01:41 Mr. Johnson: The cost total in the President's budget is $90 billion. That is about $87.8 billion in direct tax increases over a 10-year period and approximately $1.9 billion in other fees associated with various government agencies.
02:08 Let's take some of these provisions one by one. First, the intangible drilling cost (IDC) provision. What is it, and what does the administration wants to do with it?
02:17 Mr. Johnson: IDCs are the costs associated with labor, architecture, design and engineering; basically the building of an oil rig, a platform or any structure that allows the industry to get into the ground and find oil or natural gas. The ability to deduct those drilling costs really allows us to plan for the next stage of development and construction. The President is proposing to repeal our ability to deduct these costs. That simply means jobs and innovation. Many of these independent companies that are able to deduct 100 percent of these costs in year one are responsible for the technology that is used today. For example, slant drilling, where we are able to take one drill site, go into the ground and segment out several wells that allow us to minimize our environmental footprint. This is possible because companies are permitted to expense these costs in year one and put it towards technology. This is basically the research and development for our industry.
03:19 Let's take a look at another one of these provisions that the administration is talking about eliminating. What about the dual capacity rule? What is that?
03:27 Mr. Johnson: The oil and natural gas industry in the United States is considered a dual-capacity taxpayer. This means that we pay income taxes in the United States and also income taxes to foreign countries when we work abroad to access resources. To ensure that the income earned in other countries by U.S. based companies is not taxed twice, current tax law provides for a foreign tax credit. This offsets the income taxes already paid on this income to foreign governments. The administration is proposing to deny the foreign tax credit to only American oil and natural gas companies. This essentially results in a double taxation of foreign income.
04:10 Let's take a look at another one of the provisions. It is called Section 199 of the tax code. What does that refer to?
04:17 Mr. Johnson: Section 199 was established in 2004 as part of the American Jobs Creation Act. This was done to spur job creation in the United States. It is a domestic manufacturers' tax deduction. Meaning that if you make Barbie dolls in the U.S., or if you are an oil and natural gas company who extracts minerals or resources in the U.S., you are able to take this deduction. The oil and natural gas industry is frozen at a six percent deduction, while all other industries are at a nine percent deduction. If you repeal Section 199, and the ability to deduct IDC costs, you could lose 58,000 jobs in the first year and as much as 165,000 jobs over 10 years. For an administration that has almost a 10 percent unemployment rate -- this could really hurt our economy.
05:18 Aren't oil and natural gas companies already paying quite a lot in taxes already?
05:21 Mr. Johnson: Our effective income tax rate is 48 percent. Other S&P Industrials average a 24 percent effective tax rate. We are paying our fair share. Between 2004 and 2008, we paid $300 billion in income taxes and about half of that went to U.S. taxing authorities. We paid $95 billion in income taxes in just 2008 alone. That is by major energy producers and that $95 billion is income taxes paid or incurred.
05:59 Are taxes the only payments that oil and natural gas companies make to the government?
06:03 Mr. Johnson: We pay almost $100 million a day to the federal government in rents, royalties and lease payments. We have actually paid $60 billion in non-income taxes to various U.S. taxing authorities from 2004 to 2008. That doesn't even include excise taxes collected and remitted from various petroleum products. We do feel that we are paying our fair share.
06:33 Would it make sense then for the government not to raise taxes and simply allow the oil and natural gas industry to continue to make investments because that generates more revenue for the government, and also creates good paying jobs?
06:50 Mr. Johnson: We have done a study that shows that from 2011 to 2025, the negative economic consequences of higher taxes will in the long run more than offset any short-term tax revenue gains. Under the higher taxes proposed by the administration, revenues are estimated to decrease by $128 billion from 2011 to 2025. But, increased access [to energy-rich areas] would generate an estimated $150 billion in additional government revenue. Between now and the next 15 years, raising taxes on the American oil and natural gas industry would decrease revenue.
07:47 What could happen if the industry is allowed to simply move forward and do its job? What if the administration doesn't remove the tax incentives and gives the industry additional access to more energy-rich areas?
08:01 Mr. Johnson: If you let us do our job and allow us to produce more oil and natural gas in the United States by allowing increased access and provide high wages to Americans in the Gulf of Mexico, we would be able to provide $150 billion more to the government over the next 15 years and help stabilize our energy security.
08:25 Thank you for explaining the potential impacts of the administration's tax proposal and the flip side of that as well.