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  • Energy Tax Facts
  • 21 Aug 13

Shreveport Times (Bernard L. Weinstein): Higher Oil and Gas Taxes Risks Energy Security

For more than a year, we’ve heard President Barack Obama proclaim that he supports an “all-of-the-above” energy strategy for America, including increased oil and gas production. But his actions suggest otherwise.

At present, all of the Atlantic and Pacific seaboards, along with the vast majority of federally owned lands, remain off-limits to new exploration and production. The Bureau of Safety and Environmental Enforcement continues to “slow-walk” permits for deepwater drilling in the Gulf of Mexico, and the new secretary of the Department of Energy, Ernest Moniz, has indicated his agency will “take its time” in approving new export terminals for liquefied natural gas. The president’s delay and indecision regarding the Keystone XL pipeline that would transport heavy crude oil from Alberta to refineries along the Texas/Louisiana Gulf Crescent also belies Mr. Obama’s commitment to “all-of-the-above.”

In addition, both the Department of the Interior and the Environmental Protection Agency want to get into the business of regulating hydraulic fracturing, though there is no evidence the states are being lax in their oversight.

Now the president is calling for $90 billion in higher taxes on the U.S. oil and gas industry in his fiscal year 2014 budget. These revenues would be raised largely by disallowing the expensing of intangible drilling costs, repealing the percentage depletion allowance, and prohibiting oil and gas companies from utilizing several provisions of the tax code available to all other industries.

Since 1913, oil and gas companies have been able to expense intangible drilling costs which are much like the research and development deductions enjoyed by other industries. Eliminating this deduction would discourage innovation in the energy sector, thereby jeopardizing valuable advances in oil and gas exploration. For more than a century, small mineral rights owners have been able to use percentage depletion as a simple way to account for depreciation in the underlying value of their oil and gas resources. Moving to an alternative, such as cost depletion, would mean higher expenses and confusion for individual taxpayers and small companies.

The proposal to repeal Section 199 of the tax code, enacted in 2004 to help U.S. manufacturers maintain and create high-wage jobs at home, would be especially discriminatory. Eliminating this particular deduction could place thousands of jobs at risk by encouraging segments of the oil and gas industry to outsource their work to countries with lower tax rates. It could also result in higher prices for gasoline, diesel, and jet fuel, and it could well increase our dependence on foreign oil.

America benefits when domestic companies successfully compete against foreign-owned firms. Unfortunately, the U.S. tax code hampers these efforts by taxing U.S. companies on income earned abroad, money which already incurs foreign taxes. Because the U.S. is the only country to impose such a stringent double tax, more than 25 years ago Congress enacted “dual capacity” protections to address this problem and ensure American competitiveness. Here again, the Obama Administration has proposed removing protection against this “double whammy,” but only for oil and gas companies. This change would put America’s oil and gas industry at a competitive disadvantage globally that, in turn, would mean fewer U.S. jobs to support overseas operations.

One of Mr. Obama’s recurring mantras is that oil and gas companies benefit from billions in unnecessary subsidies. But the industry doesn’t receive subsidies. Rather, like every other industry, they’re allowed to take tax deductions for the expenses they incur. These deductions aren’t the product of special favors. They are the kind of standard relief afforded manufacturers, mining companies and other businesses to help defray the basic costs of operations. For example, oil and gas companies can deduct their expenses for things like equipment purchases and rig-technicians’ salaries. The point of these deductions — as for any other industry or individual — is to ensure taxes are only levied on income after expenses.

Overall, the oil and natural gas industry benefits from about $2.8 billion in annual tax deductions. For this modest loss of federal revenue, employment in oil and gas extraction has grown almost 25 percent over the past five years while total employment nationally remains two percent lower than before the Great Recession. What’s more, the industry already pays taxes at a higher effective rate than most others and contributes more than $86 million daily to the federal Treasury.

Last year, the U.S. became the world’s number one gas producing country, and within a few years we could be number one in oil production, with all the economic and energy security benefits that would follow. But placing additional tax burdens on America’s oil and gas industry, already one of the most heavily regulated and taxed sectors of the economy, won’t get us there.