• Energy Tax Facts
  • 3 Feb 15

President Obama’s 2016 Budget Proposal Derails Energy Progress

This week, President Obama released the administration’s budget proposal for Fiscal Year 2016. As in year’s past, the proposed budget takes aim at the critical tax-provisions that support America’s independent oil and natural gas producers, companies with an average of just 12 employees who drill 95 percent of the nation’s oil and natural gas wells. These provisions, including the Intangible Drilling Costs (IDC) deduction, enable oil and gas producers to deduct certain costs of doing business, similar to many other American industries, while ensuring their ability to invest in new energy production here at home.

Independent Petroleum Association of America (IPAA) President and CEO Barry Russell responded to the President’s budget, expressing his disappointment with the proposed plan. From IPAA’s press release:

“American independent oil and natural gas producers currently reinvest 150 percent of their capital budgets into new energy projects, providing over 4 million jobs and billions of dollars in revenue and taxes, while producing oil and clean-burning natural gas across the nation. However, if the President’s call to remove the IDC deduction were enacted, independent oil and natural gas producers would reduce their capital investments by up to 25 percent. These companies –– will be forced to cut production, resulting in less revenue to U.S. Treasury and fewer American jobs. This would derail America’s progress toward achieving greater energy security. The tax treatment is crucial to the continued health and operations of these companies.

“Proposed changes to the percentage depletion deduction would also impact America’s small independent producers – companies with an average of just 12 employees — and royalty owners. These stakeholders are the backbone of American energy development and they rely on the percentage depletion deduction to maintain America’s marginal wells, which generate 20 percent of American oil and more than 12 percent of American natural gas.

“Repeal of the passive loss exception would also harm these small businesses. This provision was originally instituted to ensure that small producers, who rely on private investors for financing, could compete with larger companies and gain access to capital from banks and other larger financial institutions. IPAA is greatly concerned about the impact repealing this tax provision would have on the small businesses that rely on these investments to continue exploring and producing oil and natural gas.”

As the oil and natural gas industry faces new uncertainties, it is critical the administration match its rhetorical support of oil and natural gas production with a sound, reliable tax policy. Independent oil and natural gas producers continue to take on high capital risk to develop the energy we all rely upon each day while supporting thousands of American jobs and enhancing our energy security and economy alike. Yet as IPAA and other representatives of America’s independent oil and gas producers 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.” This budget is a step in the wrong direction not only for American energy, but for the jobs and security this industry provides.