Weighing the Impacts of IRA's Energy Tax Hikes

Mark Green
Posted August 16, 2022

With passage of the $740 billion Inflation Reduction Act of 2022 (IRA), let’s weigh the energy impacts. We’ll start with the point that when it comes to American oil and natural gas, our leading energy sources, Washington is again taking a step or two backward for every step forward. It’s the wrong approach for American energy leadership. API President and CEO Mike Sommers:

“While the Inflation Reduction Act takes important steps toward new oil and gas leasing and investments in carbon capture and storage, it falls well short of addressing America’s long-term energy needs and further discourages needed investment in oil and gas. … Without a comprehensive plan for critical investment in American oil and natural gas and associated infrastructure, which provide nearly 70% of our country’s energy needs, the American people will continue to bear the brunt of short-sighted policies in Washington.”

We need decisive action forward, not Washington deal-making that undermines incremental progress on oil and gas leasing and carbon capture with higher taxes – $11.7 billion on crude oil and petroleum products, as well as a new tax on natural gas that will make needed increases in American production more difficult.

Let’s put IRA’s energy policies in a broader, outside-Washington frame: American families and businesses already are struggling with higher energy costs – largely because global demand for crude oil continues to outpace supply. So, why would Washington do anything to potentially make American oil and natural gas costlier to produce, thereby limiting the ability of U.S. energy to add to global supply and help put downward pressure on prices?

President Biden and U.S. Energy Secretary Jennifer Granholm both have said more American oil and natural gas is needed. Some parts of IRA could help American production, but other parts clearly don’t help. Other nations around the world – especially oil producers – must be asking themselves: When are Americans, through their policymakers, going to quit punching themselves in the face?

Good question.

Washington’s current approach helps foreign producers including Russia, Iran and Venezuela. They and others stand to benefit if American production is negatively impacted by higher costs – not to mention permitting and regulatory factors that remain. Impeding or decreasing American production won’t make demand go away; it’ll simply be met somewhere else.

In his blog published before IRA cleared Congress last week, API’s Lem Smith detailed key provisions in the legislation that hamper our industry’s ability to produce more energy. Let’s reemphasize a couple of them:

• Imposes minimum book tax – Imposes a new 15% minimum tax on adjusted financial statement income for corporations with more than $1 billion in income. As Smith wrote, it will likely increase taxes on an industry that’s already highly taxed while adding financial complexity and increasing compliance costs. While the new tax allows some depreciation and investment expensing, it omits the ability of American oil and natural gas producers that fall under the tax to deduct the majority of their investments incurred in developing new wells – a disincentive to production.
• Increases costs for federal onshore production – IRA doubles rental fees on leases, increases royalty rates to 16 2/3% from 12.5% and imposes a new fee just to nominate acreage to be leased.

Our industry’s concern is that these provisions – as well as the lack of both permitting reform and a substantive five-year federal offshore leasing program – could discourage new investment and production just when it’s needed most. Collectively, the bill would “hurt American energy producers and drive up energy costs for the American people,” Anne Bradbury of the American Exploration and Production Council told Bloomberg Government (subscription required).

Back to the punching-ourselves-in-the-face analogy: This is energy policy that’s at odds with itself, another mixed signal from Washington at a time when clear and tangible support for American-made energy is needed. Sommers:

The “considerable tax increases are simply the wrong policies at the wrong time. From a new corporate minimum tax to an $11.7 billion tax on crude oil and petroleum products to a new natural gas tax, this legislation imposes additional costs on American families and businesses at a time when policymakers should be looking for solutions to provide relief.”