Raising Energy Taxes – The Wrong Approach

Update: The U.S. Senate failed to reach the 60 votes needed to invoke cloture and the motion failed 51-47. (29 Mar 2012)

Today the Senate will vote to advance S.2204 sponsored by Sen. Menendez (D-NJ). This bill will raise taxes on major integrated oil and natural gas companies to subsidize other forms of energy and will do absolutely nothing to lower gasoline prices.

A new poll conducted by Harris Interactive, from March 9-13 of registered voters nationwide, found that 76% of voters believe that increasing energy taxes could increase consumer costs on a wide variety of products, including higher gasoline prices.

American voters overwhelming oppose higher taxes!

Additionally, this bill claims to end alleged “subsidies” for a handful of oil and natural gas companies. However, nothing could be further from the truth. The U.S. oil and natural gas industry does not receive “subsidized” payments from the government to produce oil and gas. In fact, the Wall Street Journal editorial board states “the truth is that this industry is subsidizing the government.” The US oil and natural gas industry on average pays over $86 million every day to the federal government in taxes, rents, royalties and lease payments.

U.S. oil and natural gas companies pay considerably more of its profits in taxes than the average manufacturing company. In fact, in 2010, the industry paid more in total taxes than any other industry sector while averaging a 41% effective tax rate. Also in 2010, oil and natural gas companies directly contributed over $470 billion to the U.S. economy in spending, wages, and dividends – more than half the size of the 2009 federal stimulus package ($787 billion) – only this stimulus didn’t require an act of Congress.

Below are more details on the specific negative effects of the tax provisions that are included in the Menendez bill:

Dual Capacity/Foreign Tax Credit denial: API’s one pager discussing how this will make American companies uncompetitive abroad is here and there are more in-depth studies on this topic here, here and here. Despite rhetoric, the provision they seek to modify ironically is a more stringent rule on taxpayers like the oil and gas industry that has, for the last 3 decades, ensured abuses do not occur. The foreign tax credit can only be used to offset foreign income taxes paid and not any other payment. Without this foreign tax credit, which has been in place since 1918, US-based companies would be substantially disadvantaged when trying to develop foreign opportunities. Specifically, companies would face the cost of double taxation on foreign operations, while their competitors would only be taxed once.Sec. 199 repeal: Section 199 is available to every single domestic manufacturer and extractive industry that qualifies and is in no way unique to the oil and gas industry. As seen here, the oil and gas industry is already penalized with respect to others as we receive a 6% deduction on income from qualified activities; everyone else receives a 9% deduction. This provision was put into place in the American Jobs Creation Act in 2004 to create and keep jobs in the U.S. – exactly what we are doing. We support 9.2 million jobs in the U.S. and contribute to 7.7% of GDP. By removing this provision from just a handful of companies it sends the message a job in the oil and gas industry is not as “valuable” as a job at Starbucks or the New York Times (both of whom get 199 at 9%). Studies have shown repealing Sec. 199 (and IDC below) for the entire industry could put 165,000 direct/indirect jobs at risk by 2020.Repeal of drilling cost deduction (IDCs): Just like the R&D deduction (comparison here) our companies can deduct costs associated with the labor and construction of a well. As you can see in this one-pager, these costs, typically 60-80% of the cost of a well, are simply cost recovery with respect to timing – there is no credit or government subsidy here. Cost recovery allows us to put that money back into projects, technology and high wages. The average upstream wage is approx $98,000/yr. This provision is not unique to the Code and could compromise thousands of jobs and billions of dollars worth of capital – in fact, this repeal along with (Sec. 199 above) could compromise 10% of America’s oil and gas production capacity by 2017.Percentage depletion: The major integrated US oil and gas companies (the target of this amendment) are not eligible for percentage depletion and have not been for over 30 years. IPAA has more on how this affects independent producers.Repeal of tertiary injectant deduction: The U.S. is a mature oil producing region but still contains many viable fields whose lives are extended through the use of tertiary injectants. These efforts secure additional U.S. production and enable many production companies to remain in business. Changing how these costs are recovered could force producers to shut in older fields and significantly impact local economies. This deduction supports using carbon dioxide in enhanced oil recovery projects, one of the primary methods by which carbon dioxide is currently stored to prevent its release into the atmosphere.

Without unfair and punitive tax increases and unnecessary new regulations - we could create 1 million more new jobs in just seven years and increase revenue to the government by $127 billion by 2020. By 2030, this program of development could boost government revenue by $800 billion and increase daily production of oil and natural gas by 10 million barrels. Add to this more imports from Canada and increased domestic bio-fuel use and we could within 15 years have the capability to secure all of our liquid fuels from North American sources.

America’s oil and natural gas companies are owned by tens of millions of Americans. More than 29 percent of shares are held in mutual funds; 27 percent are held in pension funds; 23 percent are owned by individual investors; 14 percent are held in IRAs. Five percent are held by institutions and only 1.5 percent of industry shares are owned by corporate management. Raising taxes on America’s energy producers, businesses, and retirement plans is the wrong approach to rebuilding our economy. Therefore, these tax increases are nothing more than a billion dollar tax increase on America’s oil and natural gas industry, our employees, and our nation’s retirees.

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