• Energy Tax Facts
  • 24 Apr 17

Tax Reform & the Oil and Natural Gas Industry: What You Need to Know

The Trump administration and Congress have announced plans to reform the tax code in the months ahead, with President Trump stating there will be a “big announcement on Wednesday.” No doubt any updates to the U.S. tax code will include a high level of debate, with changes to the corporate tax rate, import rates, and more still under consideration in Washington.

As American businesses of all forms monitor and weigh in to the debate, Energy Tax Facts is diving into what you need to know about the intersection of the U.S. tax code and oil and natural gas development.

1) The U.S. oil and natural gas industry pays tens of billions of dollars in taxes every year.

In 2010 alone, onshore upstream taxes paid by oil and gas companies amounted to $67.7 billion. No wonder the industry is known to be one of the most heavily-taxed industries in the nation, according to Bloomberg Intelligence research. The reach of the oil and gas industry spans far beyond the sector itself. Independent producers also support over 4 million direct, indirect, or induced jobs.

2) Historic tax provisions support continued investment into the U.S. energy economy.

Historic provisions in the tax code support the continued responsible development of energy resources here at home. The Intangible Drilling Cost (IDC) deduction, for instance, has existed for a century and allows producers to recover investment costs — like labor, site preparation, or renting drilling rigs — and reinvest into continued exploration and production. IDCs not only enable independent producers – the average companies with only 12 full time employees – to continue to invest in operations, but also support the peripheral businesses that feel the positive economic impact of energy development.

According to Vincent Piazza, a senior analyst at Bloomberg Intelligence, current efforts to reduce to the corporate tax rate could mean substantial savings for companies, stating “in theory” explorers would divert tax savings to more domestic drilling, “but nothing is ever one-for-one.” As Congress and the president debate the tax code, it is critical the purposes of tax provisions that support economic development are not forgotten just for the sake of reform.

3) These provisions are the same as many other manufacturing industries.

Deductions for the oil and gas industry are no different than those for other industries. Bakers can deduct the cost of ingredients and labor; farmers get to deduct fertilizer; and tech companies can deduct the costs of research and development. These deductions are vital for all American businesses, especially small businesses, to help them succeed and grow the economy.

It is also important to recognize that these provisions are separate and apart from subsidies. Subsidies are direct payments paid by the government for a specific purpose. Provisions like the expensing of IDCs are merely a way for companies to deduct costs that allow for reinvestments, not financial payouts from the government.

4) Taxation and reinvestment are innately connected.

Oil and gas-specific provisions in the tax code, such as the IDC and the percentage depletion deduction, help spur investment in American industry and make costly natural resource exploration feasible for smaller companies. This reinvestment provides an economic stimulus to local economies while reducing our reliance on foreign energy sources. In fact, independent producers reinvest as much as 150 percent of their U.S. cash flow into U.S. projects.

Resource exploration is incredibly expensive and is not guaranteed to bear results. IDC expensing allows companies to continue to explore even if some of the wells they drill do not recoup their investment.

5) We all rely upon energy, and need a tax code that supports this continued development.

As IPAA’s President Barry Russell recently stated in The Hill, “The Trump administration and Congress have an opportunity to foster a new resurgence in responsible energy development and support the thousands of small businesses and millions of workers that comprise this vital American industry. Updates to simplify the U.S. tax code also provide new opportunities, but reform must be approached in a way that supports capital investments – not simply reform for the sake of reform. Critical energy tax provisions, such as the Intangible Drilling Cost deduction, stimulate investment in safe American energy production. Removing these provisions could wipe out 25 percent of future investment – an act that stands in opposition to the public’s call for more jobs, economic opportunity, and security.”

America’s oil and natural gas industry supports jobs, the environment, and energy security. Updates to the tax code must continue to recognize the importance of this sector, and the importance of continued successful operations of this vital American industry.