As discussed in the June 23 newsletter, many federal income tax proposals have been drafted during the last few years that have had the potential to negatively impact the oil and gas and other extractive industries. A majority of these recent tax proposals have been drafted by the Obama White House and submitted to Congress for consideration. To date, none of these tax provisions have successfully passed Congress and, to our knowledge, none have received any significant bi-partisan support.
The American Jobs Act of 2011
In mid-September, the White House presented the American Jobs Act to Congress. In submitting this legislation, President Obama stated that "[t]his jobs bill will put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans and more jobs for the long-term unemployed." The President added, "I am committed to paying for this jobs bill...For this reason, I am sending to the Congress this detailed plan to pay for this jobs bill and realize more than $3 trillion in net deficit reduction over the next 10 years...I also included specific tax loophole closers and measures to broaden the tax base...They included cutting tax preferences for high-income households, eliminating tax breaks for oil and gas companies, closing the carried interest loophole for investment fund managers and eliminating benefits for those who use corporate jets." The President's American Jobs Act proposals applicable to oil and gas companies have not yet been submitted to Congress in a specific bill or piece of legislation.
Extractive industries are a popular target for reducing or eradicating tax deductions and increasing tax rates to pay for deficit reduction and tax incentives targeting certain other industries and individuals. In citing the need for comprehensive tax reform, the Jobs Act affirms that "the tax code has become increasingly complicated and unfair...The (current) corporate tax system provides special incentives for some industries, like oil and gas producers, yet fails to provide sufficient incentives for companies to invest in America." The reality is - no industry is currently investing in American jobs, technology and infrastructure to a greater extent than the oil and gas industry. The oil and gas industry is currently our nation's fastest-growing manufacturing sector.
Eliminating Tax Breaks for Oil and Gas Companies
The President's American Jobs Act proposes to repeal a number of tax deductions available for oil and gas production for all taxpayers (not just corporations) beginning in 2013, as follows:
- Eliminates the percentage depletion deduction (15 percent) for oil and gas production
- Eliminates Section 199 domestic production activities deduction for oil and gas production (currently 6 percent of qualifying expenses for oil and gas production; 9 percent for all other U.S. domestic producers)
- Eliminates the current expensing of Intangible Drilling Costs (IDCs)
- Eliminates the deduction for tertiary injectant costs used as part of a tertiary recovery method
- Eliminates the working interest exception to passive loss limitations for oil & gas production; and
- Extends the tax amortization period of independent producers' geological and geophysical (G&G) from 24 months to seven years.
These tax changes are estimated to reduce the U.S. deficit by $41 billion over 10 years.
Eliminating Tax Breaks for the Coal Industry
The President's American Jobs Act also proposes to repeal a number of tax deductions available for the coal industry beginning in 2013, as follows:
- Eliminates the expensing of exploration and development costs for coal activities
- Eliminates percentage depletion for hard mineral fossil fuels
- Eliminates capital gains tax treatment for coal royalties
- Eliminates Section 199 domestic production activities deduction against income derived from the production of coal and other hard mineral fossil fuels
These tax changes are estimated to reduce the U.S. deficit by $2 billion over 10 years.
Concluding Thoughts
This legislation proposed by the President is labeled as "offering a detailed set of specific tax loophole closers" aimed at "eliminating special tax breaks for oil and gas companies." The proposed legislation states, "the corporate tax system provides special incentives for some industries, like oil and gas producers, yet fails to provide sufficient incentives for companies to invest in America." Unfortunately, however, the elimination of the oil and gas and coal industry tax breaks noted above would apply to the extraction and production activity of all taxpayers regardless of size, profitability, sophistication, or business structure. Not only would large corporations be impacted by this legislation, but potentially so would small and mid-sized independent producers, publicly-traded oil and gas partnerships, start-up exploration companies, royalty owners, land owners, retired individuals and outside investors. If the stated goal is indeed to increase jobs and growth in the United States, this proposed legislation seems to be taking a contradictory approach while jeopardizing recent progress toward attaining United States energy independence.
It is unlikely that any of the above tax proposals pertaining to extractive industries contained in the 2011 American Jobs Act will be supported by or enacted by Congress this year. However, it would be wise to take this legislation seriously. We urge you to closely monitor this proposed legislation, educate yourself on the details of any actual legistlation introduced in Congress, and seek out opportunities for input and/or testimony and contact your senator or representative stating your position on this (and similar) legislation before a vote is ultimately taken.
