The President’s Energy Tax Hikes: Expensing of Intangible Drilling Costs

Yesterday, we discussed the president’s 2013 budget proposal to repeal the Section 199 manufacturer’s deduction for oil and natural gas companies – showing the disconnect between his call for more domestic oil and natural gas production and boosting U.S. manufacturing. Today, let’s look at another proposed energy tax increase in the president’s spending plan: repealing the expensing of intangible drilling costs (IDC).

Repealing IDC would generate $13.9 billion for the U.S. Treasury over 10 years. But it would eliminate a 99-year-old section of the tax code that has fostered innovation and exploration in the oil and natural gas business – playing a major role in the development of our energy resources for nearly a century.

Here’s what the president said in his State of the Union address:

“We have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.”

And:

“We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy.”

More manufacturing, jobs and energy. We’re for all three. Unfortunately, the president’s energy tax increases, including the IDC repeal, would make all three harder.

Here’s why: When energy companies drill they incur costs that can’t be recovered, such as site preparation and labor, representing 60 to 80 percent of the cost of the well. These costs accrue whether the well produces oil or natural gas or is a dry hole. Take away IDC and you increase the cost of production. Increase production costs and you discourage new energy development, which affects manufacturing and energy supply.

Since 1913 companies have been able to expense drilling costs – much like the Research & Development deduction enjoyed by other industries. Repealing IDC would discourage the very things the president wants: innovation, risk-taking, investment and new drilling activity – which helps the manufacturing sector as well as overall economic growth. We’re seeing that right now in states like North Dakota, Pennsylvania and Texas.

The president is right: There’s huge opportunity to help spur U.S. manufacturing and to capitalize on America’s vast energy riches – including the second-largest natural gas reserves in the world that are being unlocked through hydraulic fracturing.

With the right policies in place, America’s oil and natural gas companies can be a catalyst for both. Greater access to our resources could generate 1 million new U.S. jobs by 2016 while making our energy future more secure. Raising taxes on America’s oil and natural gas companies, which already are paying $86 million a day to the U.S. Treasury, will squander the opportunities the president mentioned. It’s the wrong policy for the jobs, energy and economic growth everyone wants.

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