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How Much Will It Cost to Repeal the ‘Oil Subsidies’?

A textbook case of 'cutting off your nose to spite your face'.

This week, the Senate is set to consider the repeal of certain provisions of the tax code as they relate to the oil and gas industry. By styling these tax breaks as “subsidies”, the Administration and other opponents of the industry wrongly equate them with the benefits enjoyed by ethanol, wind and solar energy. But the tax credits for alternative energy production are true subsidies, essentially cash payments to producers of energy that cannot compete in the marketplace without help.

Randall Hoven at American Thinker gives a good breakdown the specifics of the tax breaks targeted by the Administration. I’ll not rehash those details, but will add three points worthy of emphasis: 1) the tax breaks are not as unique to oil and gas as has been advertized; 2) two of the tax breaks in question are “cost recovery” deductions against income, not handouts (try telling your company’s CFO that his depreciation charge is a government subsidy); and 3) the brunt of the tax increase will be felt by independent companies, not “Big Oil”, which lost most of the benefit of these categories of deductions years ago. Energy state Democrats like Rep. Dan Boren of OK, former Rep. Martin Frost of TX and LA Senator Mary Landrieu agree that Administration proposals would indiscriminately punish “small oil”, damaging American energy security in the process.

Some 9.2 million jobs depend on the domestic oil and gas business. Oil and gas activity also creates plenty of revenue for the public coffers. It’s altogether possible that these effective tax increases could be a net negative for government revenue. Shouldn’t someone ask “Can we afford it?”

The Independent Petroleum Association of America (IPAA, the industry trade group of the “independent” producer segment of the oil and gas industry) estimates that loss of these tax benefits might lead to budget cuts on the order of 20 to 35% across the industry. Independents conduct 93% of domestic drilling, a figure quite at odds with the popular notion that domestic energy is “Big Oil’s” game. The tax breaks help many independents raise money to fund their projects; loss of favorable tax treatment might translate to 10,000 to 15,000 fewer wells drilled per year in the U.S.

Ending a US tax deduction considered crucial to independent oil and natural gas producers would cost Devon Energy about $1 billion in the first year, the company told a House of Representatives panel Friday. “That would equate to our complete drilling program in the Barnett Shale,” said William Whitsitt, executive vice president for the Oklahoma gas driller. “That looks to us like it’s a totally wrongheaded policy that would penalize companies that are most efficient at producing resources that power the nation.” … Stephen Layton, president of E&B Natural Resources, a small oil producer in the San Joaquin Valley, said talk of eliminating the deduction ignores the fact that companies like his reinvest most of their earnings, which creates jobs and increases domestic energy security. California Assemblywoman Shannon Grove, Republican-Bakersfield, called the tax proposals a “full-out assault” on the industry. “For every barrel of oil that we cannot produce here, we are importing from a volatile foreign nation,” she said. “Why are we as Americans relying so much on energy from foreign nations?”

Unlike corn ethanol or wind, oil and gas generates revenues for all layers of government.

  • Lease bonus and rental payments. Bonuses are the up-front payments the oil companies make to acquire lease rights. Annual rentals are due if the leases are not developed. Until offshore lease sales were canceled in the wake of the BP spill, Federal revenue from lease sales alone ran into several billion dollars per year.
  • Royalties. Any extraction and sale of oil and gas generates income for the owner of the mineral resource. Offshore, in Federal jurisdiction, up to 18.75% of mineral revenues flow to the Treasury, making it the #2 source of revenue. The Feds also own much of the Mountain West. Onshore, royalties may be payable to governmental bodies at the Federal, state or local level; even school boards may own mineral rights. Where minerals are owned by private interests, royalties are subject to both Federal and state income taxes.
  • Severance taxes. Most producing states levy a tax on the sale of oil and gas at the lease, payable on any and all production within that state. The average take may be in the range of 5 to 7% of value, and represents a large component of the state revenue in many of the energy states. Native American tribes may also levy a severance tax on their lands that is in addition to the state tax.
  • Ad valorem and property taxes.
  • Corporate and personal income taxes.
  • Other taxes: sales taxes, permitting and inspection fees.

As columnist Cal Thomas points out in the Miami Herald:

Oil companies are already heavily taxed. According to the energy research firm Wood Mackenzie, between 1998 and 2008, the oil and gas industry paid $1 trillion in total income taxes. That’s in addition to the $178 billion the companies sent the federal government in rent, royalty and bonus payments between 1982 and 2009. What oil companies pay in taxes is higher than the average American manufacturer, more than their “fair share.”

Wood Mackenzie also found that should taxes be increased on oil companies by $5 billion a year, that “would result in a $128 billion loss in government revenue and would reduce domestic production by 400,000 barrels per day by 2025,” with an additional 1.2 million barrels per day at risk. “This tax increase would increase, not decrease our reliance on foreign sources of oil.”

Talk about “cutting off your nose to spite your face”! The left-wingers and academics we’ve put in charge are immune to common sense and chained to their own twisted ideology.

The Democratic Party’s recent claim that “we’ve really concentrated on [growing domestic oil production]” is laughable. This Administration has done everything within its power to hobble domestic production in order to boost alternate energy sources. As the Wood Mackenzie study reveals, the best path for the Administration would be to realize that oil and natural gas will be significant fuels in the American economy for decades to come. The oil and gas industry is poised to be an incredible engine of economic growth, but it needs access to new areas and a supportive regime in Washington, D.C.

Cross-Posted at stevemaley.com.

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