• Energy Tax Facts
  • 23 May 13

Midland Reporter-Telegram: CPA committee urges caution in increasing taxes on oil industry.

Jobs, tax revenues and the nation’s energy security could be impacted by efforts to reduce the national budget deficit.

Among the budget proposals put forth — and one that has been proposed the last several years — is eliminating tax provisions utilized by the oil and gas economy, including intangible drilling cost deductions, percentage depletion, domestic production activities deductions and tertiary injectants deductions. Others include amortization of geological and geophysical expenses, the use of the Last In-First Out method of accounting for oil and gas inventories and the exception to the passive loss limitation for working interests in oil and gas properties.

In response, the Texas Society of Certified Public Accountants had its Federal Tax Policy Committee study the proposals and study the economic impact of those tax treatments were eliminated.

Midlander Larry Edgerton, a CPA with Weaver, served on the committee. He noted that President Obama has proposed eliminating the deductions the past several years, calling them subsidies for the oil and gas industry. “What I think of as a subsidy is cash out of pocket,” he said. “These are deductions, not cash payments.”

He noted that the committee had done a previous report but, in light of renewed efforts to eliminate the tax deductions, it was asked to update its study, a process he estimated took six months.

The committee noted that while the administration’s FY 2014 budget proposal estimates repealing the incentives would generate more than $90 billion in tax revenue through 2023, research has shown that eliminating these incentives would discourage domestic production, lowering job creation and increasing the nation’s dependence on imported crude.

Nelson Spear, manager, with brother Shane, of Spear Brothers Group, applauded the committee’s work, praising it for its lack of partisanship. He said he considers the proposal to eliminate the deductions counterproductive, short-sighted and hurtful to the overall economy.

“I’m a private investor, and I’m speaking from a 50,000-foot level; the committee has a ground-level view,” Spear said.

Spear noted, “Many federal employees, many state employees have their retirement in the stock market, and if their stocks don’t include oil and gas stocks, then they have a problem. It’s not just Midland that would be affected, but people with private retirement investments would be affected.”

“I think sometimes the president confuses Big Oil with independents,” Edgerton said. “So many of these deductions are not even available to Big Oil, like intangible drilling costs and percentage depletion.

The main purpose of the study, he said, was “to suggest that, before the president and Congress begin making substantial changes that could adversely affect the economy — if they cut the deficit by eliminating these deductions, it would harm the overall economy.”

Edgerton pointed out that the majority of these tax treatments involve timing, written into the tax code in the 1920s and 1930s to encourage investors to invest in high-risk projects like drilling wells. By allowing investors to recover these intangible drilling costs, which can comprise 60 to 80 percent of a well’s cost over a shorter period of time, it encourages high-risk investment.

“The president has said,” Edgerton observed, “that the oil and gas industry is no longer high risk, due to technological advances. I personally don’t think that’s true.”

Percentage depletion, limited to only small producers and royalty owners since 1975, enables marginal wells to remain active, contributing to overall domestic production.

The International Energy Agency forecasts that the U.S. will become the world’s largest oil producer, surpassing Saudi Arabia, by 2020, and become energy independent by 2030. The TSCPA committee also noted that the oil and gas industry accounted for more than 9.6 million jobs, 2.6 million directly and another 7 million indirectly, added $1.1 trillion in total value, or 7.3 percent of the nation’s gross domestic product in 2011, has invested $2.4 trillion in domestic capital projects since 2000 and pays nearly $100 million in federal and state taxes daily.

“The president and Congress need to proceed with caution,” Edgerton said. Without considering the impact of eliminating these deductions to the overall economy, it could mean “less jobs, less tax revenues, less domestic production and more dependence on foreign imports.”

Spear agreed, saying that if the budget proposal goes forward, “we will lose our energy independence opportunity. I believe the biggest threat to U.S. sovereignty is our dependence on foreign oil.”