• Energy Tax Facts
  • 30 Jul 13

Lexology: IDCs Critical to Continued Domestic Energy Production

The …upcoming debate over energy taxes and energy policy tells us a great deal about Houston’s economic future.

Texas is the largest oil and gas employer in the nation, and the city of Houston continues to be one of the most important energy centers in the world. There are almost 400,000 oil and gas workers in Texas, and last year alone that number increased by nearly 35,000.

Houston is booming, and the economic engine that is driving that growth is the oil and gas industry. Within the next few months, the debate in Washington over tax reform will intensify. The result of that debate will have enormous economic consequences for Houston.

In his 2013 State of the Union Address, President Barack Obama championed our nation’s energy policy and reaffirmed his goal of cutting net oil imports in half by the end of the decade. He said, “Today no area holds more promise than our investments in American energy. After years of talking about it, we’re finally poised to control our own energy future … We produce more oil at home than we have in 15 years … We produce more natural gas than ever before and nearly everyone’s energy bill is lower because of it.”

Three months later, the president released his budget proposal, which eliminates tax incentives for the oil and gas industry, calling them “tax giveaways.” The president might achieve his goal of ending what he calls “oil subsidies that keep us trapped in the past,” but he will do so at the expense of sound energy policy, which is inextricably tied to the nation’s tax code. The tax code may not be the best way to design a strategically sustainable energy policy, but for the past century it has been the most important.

The president is right to champion the phenomenal progress that has been made by the oil and gas industry. Almost half of the country’s natural gas production has occurred within the past four years. New technologies and advancements in horizontal drilling and hydraulic fracturing have enabled the oil and gas industry to find and recover enormous reserves of natural gas. The United States now has a 100-year supply. In the near future, by making the right choices, America could become energy-independent. In the context of fundamental tax reform, special tax breaks for every industry should be scrutinized. Nonetheless, there are tax breaks that have been fundamental to creating new technologies and have been the driving force behind some of the great advances in medicine, scientific research, technology and oil and gas exploration.

For example, the tax code gives all industries a tax break tied to research and development costs. For the technology industry, especially for new high-risk ventures, the R&D tax break has been essential. No one suggests that in the name of simplifying the tax code, this tax break should be eliminated. On a policy level, there is no difference between the R&D tax break and a tax break tied to intangible drilling costs (IDCs). The purpose of the IDC tax break is to encourage oil and natural gas production, a risky endeavor even under the best of circumstances. The IDC tax break has been in the tax law for 100 years, and it has been fundamental to the success of oil and gas exploration in America. The Obama administration wants to eliminate it. To do so could profoundly impede the president’s goal of energy independence. It is not sound energy policy or wise tax policy.

The result of upcoming debate over energy taxes and energy policy tells us a great deal about Houston’s economic future. There is much at stake.