- Truth About Tax Subsidies infographic: http://www.api.org/~/media/Files/News/Infographics/The-truth-about-subsidies.pdf
- Energytomorrow.org blog – “Energy for America, Not Higher Taxes”: http://energytomorrow.org/blog/2013/july/energy-for-america-not-higher-taxes
- Energytomorrow.org blog – “Just The Facts: No Targeted Oil & Gas Tax Credits”: http://energytomorrow.org/blog/2012/january/just-the-facts-no-targeted-oil-gas-tax-credits
- API Key Tax Issues Brief: http://www.api.org/policy-and-issues/policy-items/american-energy/energy-in-charts
- API Energizing America (Oct 2013): http://www.api.org/policy-and-issues/policy-items/jobs/energizing-america
- API Key tax issues briefs: http://www.api.org/policy-and-issues/policy-items/taxes/api-key-tax-issues
- Wood Mackenzie study – “Impacts of delaying IDC deductibility (2014-2025)”: http://www.api.org/policy-and-issues/policy-items/taxes/~/media/Files/Policy/Taxes/13-July/API-US-IDC-Delay-Impacts-Release-7-11-13.pdf
- Wood Mackenzie study – “U.S. Supply Forecast and Potential Jobs and Economic Impacts (2012-2030)”: http://www.api.org/newsroom/upload/api-us_supply_economic_forecast.pdf
- Website – “Who Owns Big Oil?”: http://www.whoownsbigoil.org/
- Sonecon study – “Who Owns America’s Oil and Natural Gas Companies”: http://www.api.org/statistics/earnings/upload/shapiro-pham-study_10_24_11.pdf
- Sonecon study – “Financial Contributions of Oil and Natural Gas Company Investments to Major Public Pension Plans in Seventeen States, Fiscal Years 2005-2009”: http://www.api.org/oil-and-natural-gas-overview/industry-economics/~/media/Files/News/2011/Report_Public_Pension_Funds_in_17states.pdf
Cheap and available energy benefits consumers and supports a wide range of jobs for everyday Americans. Given the reliance of the U.S. economy on energy, tax policy targeting one type of energy, especially increasing their overall tax burden, over another puts the government into the marketplace and creates negative impacts and other unintended effects.
The 2017 White House budget, for example, contains a proposed $10 per barrel tax on crude oil, which analysis shows will fall disproportionately on lower-income and middle class Americans, for whom essentials like transportation and grocery bills consume a greater percentage of income. Instead, tax policy should focus on investment and job creation for all energy sources, as that broadens the benefit across the spectrum of consumers and working Americans.
Discouraging investment in the oil and gas industry could substantially undermine good-paying job opportunities for minorities and women that studies have shown are available. African American and Hispanic workers are projected to account for close to 25 percent of new hires in management, business and financial jobs through 2035. Of the women projected to be hired by the industry, more than half are expected to fill management and professional occupations. Tax policy focusing on select energy investments or for limited periods, on the other hand, creates inefficient capital investment and confusion.
“Energy production and lower consumer costs are best served by innovation and entrepreneurship; government should not pick winners and losers through the tax code or technological mandates.”
Tax increases outlined in the Administration’s FY2017 Budget are punitive and harmful to an industry that continues to provide stable, high-paying American jobs.
There is a choice when it comes to the policies that will help shape America’s energy future. Sound energy policies consisting of oil and natural gas development – unfettered by the kind of tax increases the administration is proposing – could create one million new jobs in just seven years and increase revenue to federal and state governments by $127 billion by 2020 and $800 billion by 2030. For the industry, our nation’s economy, and the American people, the choice seems clear.
Below are the specific provisions targeted in the FY2017 budget:
New Oil Fee ($319B)
This proposed tax of $10.25 per barrel would be imposed on domestically produced crude and imported crude and petroleum products. Exported crude and petroleum products would not be subject to the tax and domestically sold home heating oil would be temporarily exempted. The tax would be phased in over a five-year period.
Targeted repeal of Sec. 199 for only Oil and Natural Gas Companies ($9.1B)
This deduction was established in 2004 to help U.S. manufacturers maintain and create U.S. jobs. This deduction is available on qualifying income from all domestic manufacturers at 9%; however the oil and natural gas industry is limited to only 6%. Repealing this deduction for only the oil and gas industry places hundreds of thousands of jobs at risk and undermines efforts to reduce our dependence on foreign oil.
Repeal Expensing of Intangible Drilling Costs ($10B)
Drilling for oil and natural gas involves expenses such as site preparation and labor, representing 60 to 80 percent of the cost of the well. Since 1913, companies have been able to expense these costs, much like the R&D deduction enjoyed by other industries. Cost recovery is an essential part of all business models and IDC, just like R&D, serves identical policy goals: innovation, development, and growth. Eliminating the IDC deduction would discourage innovation in the energy sector, jeopardizing additional valuable advances in oil and gas exploration, high paying jobs, and America’s energy security.
Modifications of Dual Capacity Rule ($9.6B)
The Budget’s international provisions include a proposal to modify rules for dual capacity taxpayers. This modification will subject only U.S. based companies to double taxation on income earned overseas and greatly impact both foreign and domestic investment. Studies indicate U.S. based oil and gas companies will be significantly restricted from growing and expanding in the world marketplace – costing US revenues and US jobs that support overseas operations.
Repeal of LIFO ($28.4B)
The “last-in, first-out” or LIFO accounting method is not a “gimmick” or tax loophole. It is a well-established way to determine book and taxable income for companies that anticipate inflation or rising prices over the course of their operations used by many industries. Repealing LIFO would require companies to redirect cash or sell assets in order to cover the tax payment – potentially destroying some businesses.
Increase G&G Amortization Period and Repeal Deduction for Tertiary Injectants ($1.6B)
Changing how these costs are recovered could limit US production of oil and natural gas. These provisions allow producers to quickly recover the costs of finding new reserves and the costs associated with keeping older reserves going. Increasing the amortization period for these costs impacts the cash flow needed to keep oil and natural gas production strong.
Reinstate Superfund Taxes ($11.1B)
The proposal to reinstate Superfund taxes would impose additional taxes on crude oil and petroleum products unfairly. These products do not account for a substantial portion of the Superfund liability yet would be responsible for most of the taxes.
Repeal of Percentage Depletion ($4.9B)
For over a century small mineral right owners have been able to easily recover their investment costs in the underlying mineral is produced by using percentage depletion. Requiring cost depletion will add costs and confusion to individual taxpayers and small companies.
Treat MLPs for Fossil Fuels as C corporations ($1.4B)Master Limited Partnerships (MLPs) are entities that are treated as partnerships for tax purposes but whose ownership shares are traded publically. Income from MLP assets is taxed once upon distribution and this proposal would impose a second level of tax on fossil fuel MLPs.
Repeal of Enhanced Oil Recovery (EOR) ($8.8B)
This provision phases in as the price of domestic oil falls below a defined price floor in order to support continued production from older reserves.
The Truth on Oil “Subsidies”
“Oil and gas subsidies are costly… Removing [them would] generate $38.6 billion of additional revenue over the next 10 years.” — President Barack Obama
“No money from the U.S. Treasury goes to the oil industry” — Washington Post
So What’s the President Talking About?
INTANGIBLE DRILLING COSTS
Since 1913, oil & gas firms have deducted the upfront costs of exploration and production. By eliminating this deduction, President Obama hopes to raise $1.5 billion annually.
Pharmaceutical companies and biotech firms deduct research and development costs up front. It’s unfair to treat oil & natural gas firms any differently.
The last-in, first-out (LIFO) inventory method of accounting has been used for more than 70 years by U.S. taxpayers and is fully recognized and regulated by the IRS.
Repealing LIFO creates an assumed tax bill without any corresponding cash gain. Taxing inventory, not income, would require companies to redirect cash or sell assets in order to cover the tax payment.
FOREIGN TAX CREDIT
U.S. taxpayers that pay foreign taxes on foreign income can take credit to avoid double taxation. By repealing this for oil & tax firms, President Obama hopes to raise $1 billion annually.
It’s unfair to subject oil & natural gas companies to double taxation. Worse, eliminating it would undermine their ability to compete internationally.
DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
Available to all taxpayers, this deduction was created to preserve U.S. manufacturing jobs. By repealing it for oil & gas firms, President Obama hopes to raise $1.4 billion annually.
Repealing this deduction for just the oil & gas industry (rather than all taxpayers) is not “tax fairness.”
It’s a well-circulated myth that America’s oil and natural gas industry receives federal subsidies. Subsidies are cash outlays from the U.S. Treasury, and industry doesn’t get them. Similarly, there are no targeted tax credits currently being used by industry. Legitimate tax treatments used by oil and natural gas companies – similar to those used by other business sectors – regularly come under attack by those pushing for higher taxes on energy companies.
For example, the expensing of intangible drilling costs (IDC) is a favorite target. Created in 1913, it allows oil and natural gas companies to expense ongoing business costs – such as site preparation and labor that accrue whether the well produces oil or natural gas or is a dry hole. IDC is much like the research and development deduction enjoyed by other industries, and eliminating it would increase production costs and discourage new energy development.
One Wood Mackenzie study estimates 190,000 Americans would be unemployed next year if IDC is repealed, growing to 265,000 jobs lost over a decade. Fewer wells drilled and decreased energy investment could cause domestic oil and natural gas production to fall 14 percent below current expectations after 10 years, the study said.
IDC isn’t the only issue. There are other examples, including the Domestic Production Activities Deduction, the Modification of Dual Capacity Rule and LIFO, the “last-in, first-out” accounting method, which falsely get called subsidies or tax breaks. Singling out the oil and natural gas industry for tax increases by taking away a provision like the Domestic Production deduction – used by virtually all U.S. businesses – would likely increase costs, hurt production and curb job growth.
Profit margins provide one useful way to compare financial performance among industries of all sizes.
Oil and natural gas earnings are typically in line with the average of other major U.S. manufacturing industries, but not recently.
Published data for 2011 to 2015 shows the oil and natural gas industry earned on average 3.9 cents for every dollar of sales in comparison with all manufacturing which earned on average 8.7 cents for every dollar of sales.
Growth in the world’s supply of crude oil has outpaced the growth in global demand, which has led to sharply lower prices, and lower earnings.
U.S.-based oil and gas companies must structure their operations and invest substantial capital where the resource is found rather than where the best tax regime is located. As a result, U.S.-based oil and gas companies’ overseas income is often subject to very high effective tax rates. In addition, operations in the U.S. generate separate state and federal income tax obligations or payments, causing the industry to have an effective tax rate above the federal statutory rate of 35 percent.
Retailers are placed in a similar situation as they must naturally align their locations with customers, which can lead to higher effective tax rates. Other industries, however, may have greater flexibility on where they locate their physical capital or other operations to meet their customer needs. As a result, they may be able to establish activities in locations with lower effective tax rates.
The Smart Path Forward
Often lost in the political discussion of raising taxes on oil and natural gas companies is the negative effect of higher costs on production, job creation and – ironically – revenue generation for government. A study by Wood Mackenzie quantifies the impact of the administration’s proposal for more than $90 billion in additional taxes and fees on oil and natural gas companies over a 10-year period: 48,000 jobs lost and 700,000 barrels’ worth of oil and natural gas per day lost by 2020. The kicker: Raising taxes would actually lose the government $29 billion by 2020.
There’s a better path to raising additional revenue for government: Increase access to resources and allow more oil and natural gas development. More revenue for government, more jobs, more energy.
Tax Policy and Effects on Americans’ Investments
No discussion of taxes and the U.S. oil and natural gas industry is complete without acknowledging the potential impact of higher taxes on regular Americans – the true owners of “Big Oil.” If you have a mutual fund account, and 57 million U.S. households do, there’s a good chance it invests in oil and natural gas stocks. If you have an IRA or personal retirement account, and 46 million U.S. households do, there’s a good chance it invests in energy stocks. If you have a pension plan, and 61 million U.S. households do, odds are it invests in oil and natural gas.
A strong oil and natural gas industry is a vital part of the retirement security for millions of Americans. A common misconception is America’s oil and natural gas companies are owned – and therefore benefit – a small group of insiders. In fact, just 2.9 percent of industry shares are owned by corporate management. The rest are owned by tens of millions of Americans, many of them middle class.
A November 2015 survey conducted for API by Harris Poll among U.S. registered voters found that:
66% of American Voters Oppose Higher Taxes That Could Decrease Energy Production.
61% of American Voters Agree that Higher Energy Taxes Hurt Everyone.
“Pro-energy policies are a clear winner because likely voters from both parties recognize its key role in job creation and economic growth… Voters say they support candidates who stand behind pro-development, all-of-the-above energy policies. The results of our poll provide a lesson for candidates running in 2016: pro-energy policies win.” – API President and CEO Jack Gerard