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More taxes, less jobs
Oil and natural gas companies are responsible for about 9.2 million jobs in this country and about 7.5 percent of its GDP. Raising taxes on this industry would force companies to delay or scrap future projects as it becomes significantly harder for them to recover their investment costs. Repealing the below deductions and credits could kill 170,000 jobs and ultimately reduce government revenue, according to a Wood-Mackenzie study.

Encumbered by taxes
Already paying a little over $85 million a day, the oil and natural gas industry’s earnings are taxed at an effective rate of 41 percent. Compare this to the average income tax rate of 26 percent for non-oil and natural gas companies in the S&P 500 and it is clear that oil companies are paying their “fair share.”

Repealing the following twelve tax policies employed by energy producer would raise these businesses taxes by $95 billion. Eliminating the first eight tax policies increases oil and natural gas companies’ taxes by $41 billion. 

1. Intangible Drilling Costs.  Current law allows energy companies to deduct most (only 70% of these costs for the larger companies) of the costs associated with drilling.  All expenses should be deductible in the year they are incurred.  Stimulus 2.0 would repeal this and make companies deduct the costs very slowly over fifteen years.

2. Tertiary Injectants.  Current law allows energy companies to deduct the cost of injecting materials into older energy reservoirs in order to keep them productive.  This is the proper tax treatment of this cost.  Stimulus 2.0 would replace this very ordinary deduction with precisely nothing.  Energy companies would simply have to eat the cost with after-tax dollars.

3. Percentage Depletion.  This refers to a provision of law that allows taxpayers to recover their lease investment in a mineral interest through a percentage of gross income from a well.  Stimulus 2.0 would repeal this provision ONLY for investments in oil and gas wells.  Interestingly, the largest oil companies don’t benefit from this today, so this tax increase is targeted only at smaller energy companies and their investors.

4. Manufacturer Tax Deduction (aka “Section 199”). All employers are today allowed to deduct up to 9% of the cost of domestic manufacturing—all employers, that is, except energy companies, who can only deduct 6% of such costs.  Stimulus 2.0 would deny this deduction entirely to energy companies, singling them out by picking winners and losers in the tax code.

5. Oil and Gas Passive Losses.  In general, “passive” (trade or business activities without active participation) losses are not allowed to be claimed by taxpayers.  There is an exception for investment in oil and gas extraction.  Stimulus 2.0 repeals this exception, which will tend to hit small energy companies and their investors the hardest.

6. Geological and Geophysical Costs.  Currently, small energy companies can deduct the costs of exploring for new sources of energy over two years (again, the proper treatment should be to expense in the first year).  Stimulus 2.0 would stretch this period to seven years.  This only affects small, independent energy employers as larger companies are ineligible for the two-year treatment under current law.

7. Enhanced Oil Recovery Credit.  This credit, intended to spur oil production even when prices are low, can only be claimed when oil is less than $42 per barrel.  Oil is currently about $87 per barrel, so this credit is nowhere near claim-able.  Nonetheless, Stimulus 2.0 repeals the credit just to raise taxes while scoring cheap points against energy employers.

8. Marginal Well Production Credit.  This credit is the same as the Enhanced Oil Recovery Credit in Sec. 437, but it is only use-able when oil prices drop to $27 per barrel.  Stimulus 2.0 repeals this credit for similar reasons.

9. Dual Capacity Rules (tax increase of $10 billion).  The U.S. is one of the only nations which attempts to tax on a “worldwide” basis—even on income which has already faced income taxation in other countries.  When combined with the highest corporate tax rate in the developed world, “worldwide” taxation is an uncompetitive jobs killer.  In order to avoid international double taxation, employers can claim a tax credit for income taxes paid overseas.  Stimulus 2.0 makes it more difficult for energy companies to claim this tax credit, exposing their worldwide income to international double taxation—potentially shipping jobs overseas to avoid paying taxes twice.

10. Repeal last-in, first-out (LIFO) method of accounting for inventories (tax increase of $52 billion, $22.5 billion on oil and natural gas industry). A long-accepted accounting method, LIFO is employed both by small businesses and energy producers. Retroactively taxing businesses accrued LIFO reserves would drain these entities of capital.

11. Reinstate Superfund taxes (tax increase of $19 billion). Reintroducing a $.10 excise tax on barrels of oil, the superfund tax would generate revenue for the Superfund Trust Fund (STF). The STF would initially be used to clean up hazardous substances released into the environment but likely be raided for other uses—just like Highway Trust Fund is used to pay for bike paths, subsidize subways, and finance other non-highway projects. Proving the STF unnecessary, energy producers have responsibly removed waste since the elimination of the Superfund in 1996.  

12. Repeal the coal industry’s tax policies (tax increase of $2 billion). Just as Obama proposed to raise the oil and natural gas industry’s taxes, the president has also looked to repeal similar tax policies employed by the coal industry. Specifically, Obama has proposed to eliminate the expensing of exploration and development costs (described as number one of ATR’s analysis), percent depletion (number three), capital gains treatment for royalties, and Section 199 (number 4).