Oil and gas industry association officials blasted a proposal sent by several congressional Democrats to the deficit reduction super committee on Nov. 2 to raise revenue by eliminating key provisions benefiting the industry. Congress and the super committee should take the necessary time to comprehensively address tax reform questions and resist apparently easy suggestions which actually would do more economic damage, they said on Nov. 7.
“Some of the proposals are just punitive to oil and gas as a sector. Others are even more specifically selective and more punitive by selecting just a handful of companies,” American Petroleum Institute Pres. Jack N. Gerard said in a teleconference with reporters. “All you have to do is look at corporate earnings, and you’ll find companies that make more but pay a lower effective tax rate. No one is calling for higher tax rates for those companies, nor should they. We should be focused on creating jobs, not punishing a particular industry.”
Others questioned the wisdom of Congress trying to make major tax policy reforms in such a short period. “Proposals to drop corporate rates into the 25% level will require repealing significant depletion exemptions that are way beyond our industry, such as eliminating accelerated depletion and the manufacturers’ tax deduction for every industry, not just ours,” noted Lee O. Fuller, vice-president of government relations at the Independent Petroleum Association of America. “When you start sweeping through it in that context, we’re a minor player.”
In a separate interview, V. Bruce Thompson, president of the American Exploration & Production Council (AXPC), said, “It’s a blanket approach—just get rid of everything oil and gas, and let the chips fall where they may. Our concern is with the thinking on intangible drilling cost deductions, which is clearly a tax code provision which lets us recover, in the year of expenditure, any items that have no salvageable tax value, as with any company’s research and development expenses.”
Negative impacts
“These tax increases would hurt American consumers and employers by raising the costs of driving, raising the costs of manufacturing and transporting products, and raising the costs of operating businesses,” National Petrochemical & Refiners Association Pres. Charles T. Drevna said in a statement. “They would make it harder for American oil and gas producers, and fuel and petrochemical manufacturers to compete with foreign rivals on a level playing field. This would wipe out jobs, weaken our economy, and increase America’s reliance on foreign oil, fuels, and petrochemicals.”
Their responses came after several congressional Democrats urged the super committee to repeal federal tax provisions which directly benefit the oil and gas industry or exclude the industry specifically from general corporate tax exemptions. “This is not class warfare. This is common sense,” declared Robert Menendez (NJ), a Senate Energy and Natural Resources Committee member, in a Nov. 2 press release. “We want the oil companies and their shareholders to do well, but we should not be spending 21 billion taxpayer dollars to unfairly reward their tremendous success.”
“I applaud the success of these companies and believe that in the United Sates individuals should, through merit and hard work, be able to build wealth,” Rep. James P. Moran (Va.), ranking minority member on the House Interior Appropriations Subcommittee, said in a commentary in the Nov. 3-9 Falls Church (Va.) News-Press. “But given their profitability, it's clear that these companies do not need their current tax breaks and the public subsidies they receive. Big oil tax expenditures are, without doubt, wasteful spending of taxpayer dollars. Removing these tax breaks will not hurt the oil and gas industry, nor will it affect the price of oil.”
Gerard disputed such characterizations. Oil and gas pays more in total corporate taxes than any other US industry, he maintained. Its effective 2010 tax rate was an average 41.1%, compared with 26.5% for other businesses in Standard & Poor’s Industrial Index, and the tax provisions critics target are no different than normal business deductions and cost recovery mechanisms widely used throughout the US economy, he said.
Recurring stimulus
“And it doesn’t end there,” Gerard continued. “In 2010, we directly contributed more than $470 billion to the US economy in spending, wages and dividends—more than half the size of the 2009 stimulus package. But this stimulus happens every year without an act of Congress and at no cost to taxpayers.” An advertising campaign that API plans to launch on Nov. 8 as part of its ongoing issues advocacy efforts recognizes four super committee members who have opposed higher energy taxes, he said.
The intangible drilling costs exemption is the biggest issue for AXPC’s members, Thompson told OGJ. “Our members spend 95-110% of their cash flow each year drilling wells,” he said. “If their tax bills are materially increased, it will reduce the number of wells drilled in the United States, which I don’t think anybody wants.”
Fuller said that for IPAA’s member companies, ill-considered general tax code changes could pose nearly as big a threat as efforts aimed specifically at oil and gas producers. “A lot of independent producers file as corporations, but others, such as limited liability companies and master limited partnerships, file as individuals so they can reflect deductions in their individual returns,” he said. “So if Congress simply lowers the corporate tax rate without a pass-through for individuals, several independents would lose deductions but keep the higher rate because they weren’t filing as corporations.”
This interaction between tax rates and deductions is very significant, particularly for small business filing as individuals, he noted. This is why in the debate on tax reform, all the provisions need to be examined carefully. They can’t be honestly assessed in a short period,” Fuller told OGJ. “There were four years of vigorous debate before Congress passed the 1986 tax bill. We have the issues of being isolated as an industry, and the broader issue of across-the-board proposals which have not being fully considered.”
Thompson said, “We’re one of the few industries which is actually creating jobs. It makes no sense to throw us under the bus. This whole process needs to be conducted comprehensively, not over 6 weeks, if it’s going to be done right. There’s no rhyme-or-reason to raise a company’s taxes just because it has oil and gas in its name. That’s the frustrating part of it.”
May shape 2012 debate
The next few weeks could be significant, Gerard suggested. “There’s been a lot of focus on the super committee related to revenue and taxes,” he said during the teleconference. “The way that debate concludes will tell us what the game plan will be going through 2012. We believe there will be conversation around tax issues and corporate tax reform, but until the super committee concludes its deliberations, I don’t think it’s likely that anything will be resolved. I’m not certain if anything will be considered next year or before the end of this Congress.”
He said that some in Washington believe the country already has entered the 2012 election cycle and a lot is riding on the outcome. Gerard said that the super committee’s discussions could matter more in the next few weeks, depending on whether it forms a framework for debate in 2012 or simply delays it until after next year’s elections.
“It’s fundamental to the debate that every person in the country is focused on jobs. That’s where our industry can play such a critical role,” Gerard said. “This summer, while job growth generally was anemic, our industry continued to create jobs. Clearly, the public sees the issues the way we do: Let’s people back to work, let’s put the economy back on track, and then let’s focus on ways we can stay internationally competitive.”
US oil and gas companies simply want the same tax treatment that those in other industries receive so they can compete with foreign firms and continue to provide well-paying domestic jobs, NPRA’s Drevna said. “Instead of demonizing and vilifying American manufacturers of proven and reliable fuels and petrochemicals—along with the workers who make these vital products—policymakers should join us in working to best serve the American people and preserve and create jobs,” he said.
Contact Nick Snow at [email protected].