• Energy Tax Facts
  • 26 Sep 14

Senate Finance Committee Talks Energy Taxes

This month, the Senate Finance Committee held a hearing on the U.S. tax code as it pertains to American energy development, including the role and future of certain provisions that impact America’s independent oil and natural gas producers.

Present at the hearing was the Honorable Don Nickles, who served in the U.S. Senate from 1981 to 2004, and who currently serves as Chairman and CEO of Nickles Group LLC. Nickles discussed in his testimony how America is currently experiencing an energy resurgence thanks to oil and gas development here at home, yet that some suggested changes to the tax code could hinder this tremendous output.

From the Honorable Don Nickles:

“We are experiencing a major renaissance in the domestic oil and gas industry, Mr. Chairman.  The International Energy Agency predicts that the U.S. will be the world’s number one producer of oil by 2015. In 2013 we reduced our imports of oil by 15 percent and of natural gas by 32 percent.  Our exports of refined products have increased 60 percent since 2010 and we are now the world’s largest combined producer of oil and natural gas.

“When the President first proposed his energy tax increases in 2009, the domestic oil and gas industry was investing $232 billion.  Last year the industry invested $322 billion, a 40 percent increase.  This industry is the shining light in our otherwise lackluster economy, but if the President’s proposals had been enacted that amazing growth would have been threatened.”

Unfortunately, the current Administration has made repeated calls to repeal certain tax provisions that support the continued health and output of America’s independent oil and gas producers. One of these provisions is the Intangible Drilling Cost (IDC) deduction, a century-old provision that enables America’s independents to deduct certain non-salvageable costs – similar to deductions provided to technology companies for research and development costs or farmers for fertilizer. In turn, this deduction helps to ensure producers are able to continue investing in oil and gas production here in the United States, reinvesting on average 150 percent of their cash flow into new production, while affording the high capital cost of energy development.  As Nickles points out in his testimony, “IDC’s are the ordinary and necessary business expenses of this industry” and changes to how these items are deducted over time could have a dramatic impact on America’s energy resurgence.

Oil and gas development is supporting thousands of American jobs, while enhancing our energy security and economy alike. Yet as IPAA and other representatives of America’s independent oil and gas producers – companies who produce roughly 56 percent of American oil and more than 85 percent of American natural gas — wrote in a joint letter in December 2013, “these positive trends could all be put at risk if tax reform limits independent producers’ access to capital and cost recovery mechanisms.”

The IDC deduction, percentage depletion, and passive loss exception are all critical tax provisions for America’s small independent oil and gas companies. Tax reform is no simple task, but ensuring the future of fair and appropriate tax provisions that support domestic oil and gas development is critical to not only to the future of American energy development but for the economy and small businesses alike.

As this debate continues, IPAA will continue to provide the facts on this critical topic.