Biden Plan to Repeal IDCs Threatens Manufacturing Jobs, Raises Energy Costs

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Posted by Alexander Hendrie on Thursday, June 3rd, 2021, 12:59 PM PERMALINK

President Joe Biden and Congressional Democrats have proposed repealing various tax provisions they describe as “oil and gas subsidies.” Many of these provisions, such as the deduction of intangible drilling costs (IDCs), are not subsidies but are important tax provisions that promote investment, job creation, and growth. Repealing this provision and raising taxes on oil and gas taxpayers is a reckless policy proposal that will threaten manufacturing jobs across the country and raise the cost of energy for American families.

What are IDCs?

IDCs allows independent producers to immediately deduct business expenses related to drilling such as labor, site preparation, repairs, and survey work. As a recent letter led by Rep. Jodey Arrington (R-Texas) and signed by 55 members of Congress explained, IDCs are neither unique nor lavish tax breaks for the oil and gas industry:

“IDCs are not credits, loopholes, or subsidies. They are ordinary and necessary deductions, and a far cry from the lavish tax credits flowing to wealthy green energy investors and electric vehicle owners. Our tax code is designed to levy taxes on net profits, not on dollars used for operational costs or capital expenditures. Every business since the inception of the tax code, has used cost recovery provisions.”

There are several recent proposals that would repeal IDCs along with a host of other tax provisions for oil and gas. For instance, Senate Finance Committee Chairman Ron Wyden (D-Ore.) recently proposed several tax increases on oil and gas in his “Clean Energy for America Act.” President Joe Biden’s recently released Fiscal Year 2022 budget also calls for repealing these tax provisions as part of his plan to raise taxes on the industry by over $100 billion. Finally, pro-socialist politicians Senator Bernie Sanders (I-Vt.) and Rep. Ilhan Omar (D-Minn.) have introduced legislation with these tax increases.

Repealing IDCs is bad tax policy.

The deduction for IDCs is consistent with immediate expensing offered to all business investments, a policy change instituted in the Tax Cuts and Jobs Act of 2017. Currently, taxpayers can immediately deduct the cost of most assets (those with 20 years or less of depreciable life) in the year they are purchased. This policy incentivizes new investment, leading to greater economic productivity, job growth and higher wages. It also simplifies the tax code by equalizing the tax treatment of new investments with other business expenses such as wages, rent, and healthcare costs. 

In the past, many Democrats have recognized that full business expensing is not a loophole, but an important way to promote investment. For instance, former Obama Economic Adviser Jason Furman has long supported full business expensing, and the policy was included in several Obama budgets (albeit as part of a net tax increase). 

The Obama White House correctly noted that the provision would help businesses and workers in press releases and fact sheets: 

“If a business bought an additional $1 million worth of equipment next year, they would be able to deduct the full $1 million up front, potentially accelerating hundreds of thousands of dollars in tax cuts. That’s real money that businesses… could use to expand or hire new workers right now, and provides a strong incentive to increase investment now, creating even more jobs.” 

Repealing IDCs will cost jobs and investment.

IDCs support high-paying American jobs across the country. As noted in a 2014 study by Wood Mackenzie consulting, repealing the immediate deduction for IDCs would cost 265,000 jobs in the long-term. Given that this study was conducted almost a decade ago, it is entirely possible that job losses would be greater if the provision was repealed today.

Repealing IDCs will also reduce investment in the economy by $407 billion in the long-term because businesses will have less cash to invest in new projects. While it would have a significant economic impact, repealing IDCs would raise very little revenue. According to the Joint Committee on Taxation, repeal of IDCs raises $3.5 billion over the next decade. President Biden’s FY 2022 budget assumes repealing IDCs would raise $10.5 billion, which if true, would make it a greater, but still relatively insignificant revenue raiser.

Oil and gas businesses collectively support 11 million high-paying manufacturing jobs. In 2017, these jobs paid an average salary of $102,000, 85 percent higher than the average private sector salary.  Given President Biden routinely talks about the need to create millions of new high-paying manufacturing jobs, one would think he would support retaining provisions like the deduction for IDCs. Instead, he wants to repeal these provisions and raise taxes on existing manufacturing jobs.

Repealing IDCs will raise costs and threaten American energy independence.

Biden and Congressional Democrats are proposing this tax increase at a time that energy prices have increased significantly. The cost of gasoline is at a seven-year high and in some parts of the country costs over $4 per gallon. According to the Bureau of Labor Statistics, Gasoline prices have increased by 49.6 percent between April 2020 and April 2021 while oil has increased 37.3 percent.

After being reliant on foreign energy in past decades, the U.S. became a net energy exporter in 2019 and 2020. This achievement helps America’s economy and strengthens national security as we are less reliant on foreign powers for our energy needs. Instead of building on this strengthen, Biden would diminish it, a move that would increase global reliance on hostile nations like Iran and Russia for energy.

Photo Credit: Gino Pezzani

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