• Energy Tax Facts
  • 12 Aug 13

Roanoke Times (Column): Don’t Impeded Oil and Gas Production By Cutting IDCs

As a senator, candidate and now president, Barack Obama has regularly assailed oil companies. His mantra for action has been hit them with higher taxes and punish them with regulations.

You know the words to his song: “We have subsidized oil companies for a century. That’s long enough.” “Tax giveaways aren’t right . . . and we need to end them.”

Add to that Obama’s refrain: “These companies pay a lower tax rate than most other companies on their investments, partly because we’re giving them billions in tax giveaways every year.”

Contrary to Obama’s assertions, there are no taxpayer giveaways to oil companies. Nevertheless, according to Americans for Tax Reform, his 2014 budget proposal contains $94 billion in tax increases on energy, heavily tilted to have an impact on the oil industry. If his proposals make it into law, the likely effect will be higher consumer prices and fewer American jobs.

Keep in mind that the oil and natural gas sector of the U.S. economy has been one of the few that has steadily created jobs over the past five years. All together, the American Petroleum Institute reports the industry supports 9.8 million U.S. jobs.

In answer to the canard about oil companies not paying their fair share, industry representatives point out that oil and gas companies pay an effective income tax rate of 44.6 percent — higher than any other industry in the country — and on top of that make royalty payments, bonus bids and lease payments to federal and state government treasuries.

When it comes to what Obama calls “subsidies,” it is instructive to examine what the tax code allows and what Obama proposes to do to oil companies.

Take “intangible drilling costs” — the operating costs for preparing and drilling oil and gas wells. The IDC deduction is a significant incentive to drill, because it does not increase revenues or profits but increases cash flow and allows companies to spend more money drilling new wells

All businesses, including giants like Apple and Microsoft, and others like the nation’s pharmaceutical companies, are allowed to deduct operating costs when incurred, but Obama would deny that same tax treatment to oil companies.

The Obama proposal, which would impose an $11 billion hit over 10 years , would have huge immediate effects, according to a study by the consulting firm Wood Mackenzie commissioned by API in 2011: Fewer investments, fewer wells drilled, fewer Americans employed, and less energy produced.

The IDC deduction isn’t the administration’s only target; there are 10 tax increases in the proposed budget. One has to ask what might be the effect of encouraging, rather than discouraging, domestic energy development.

The Wood Mackenzie analysts have said that given a reasonable regulatory environment, domestic oil and gas development could be responsible for creating 1.4 million new jobs by 2030 and $800 billion in new government revenue.

In an analysis of data from the Congressional Budget Office commissioned by the Institute for Energy Research, Joseph Mason of Louisiana State University and the University of Pennsylvania Wharton School says, “Opening federal lands and waters to oil and gas leasing will generate federal tax revenue far exceeding revenue sought through levying new taxes on existing oil and gas production.”

“The economic impulses created by opening federal lands and waters to oil and gas extraction could therefore help significantly to spur economic growth — and help break the economy out of its sluggish post-recessionary malaise.

“Importantly, those benefits would be realized without any increase in direct government spending. Rather, increased output would refill national, state and local government coffers — depleted by the current economic crises — without additional government outlays,” Mason concludes.

Obama has been focused on developing a green-energy sector to displace oil, gas and coal. But experts all say that while wind and solar and biofuels are slowly establishing a place in our economy, fossil fuels will be the dominant source of energy for decades into the future.

One hardly thinks of Virginia as having much of an oil and gas presence, yet industry data show it is responsible for more than 141,000 direct, indirect and induced jobs in the state. In the non-gas station aspect of the industry, incomes average more than $57,000 a year. Three percent of Virginia’s GDP — $12.5 billion a year — can be attributed to the oil and gas industry.

Virginians also understand the effects of higher taxes on their pocketbooks. Polling in March of this year conducted by Harris Interactive for API showed 72 percent believe increasing taxes will drive up consumers’ energy costs.

Hammering oil and gas companies with new tax burdens can only be a negative for energy, jobs and economic growth, and Congress should take a strong stance against them.