API Oil tax proposals reflect Obama's energy inconsistency

More than $85 billion in new oil and gas taxes in US President Barack Obama’s proposal to reform federal corporate tax rates reflect his administration’s inconsistent attitude toward the industry, American Petroleum Institute Pres. Jack N. Gerard said. He strongly objected to characterizing recovery of normal business expenses as tax preferences and loopholes.

“Certainly, it’s better to hear the administration talk about more US oil and gas production than when the president called it yesterday’s energy in last month’s State of the Union address,” he told reporters during a Feb. 23 teleconference. “But what is being proposed will actually chase away energy investment in our country. It will stifle expenditures, discourage development, and drive prices up.”

Administration officials have said that eliminating what it considers special tax breaks is essential before the US corporate tax rate can be reduced from 35% to a more globally competitive 28%. Industry leaders expect the proposal to include the same new oil and gas taxes that are in the White House’s fiscal 2013 federal budget request.

“Our current corporate tax system is outdated, unfair, and inefficient,” Obama said on Feb. 22. “It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world. It is unnecessarily complicated and forces America’s small businesses to spend countless hours and dollars filing their taxes. It’s not right, and it needs to change.”

‘Special benefits’

“Our corporate tax rate is now on pace to become the highest among all developed economies,” US Sec. of the Treasury Timothy F. Geithner separately said on the same day. “The rate is high in order to pay for a tax code full of special benefits for certain industries and certain activities. You can call these tax preferences, tax expenditures, loopholes, incentives, or tax benefits. But whatever you call them, they are subsidies. They are spending through the tax code. And they are expensive, costing billions of dollars a year.”

The provisions are fundamentally unfair because they flow to certain industries and not others, according to Geithner. “Right now, companies in some industries pay two or three times the effective tax rates as companies in other industries,” he said. “For example, the effective tax rate on an investment in buildings or other structures by a manufacturing company might be twice as high as the rate that applies to an oil or gas company.”

“I think what he said was an effort to confuse the issue by not recognizing standard business deductions and cost recovery mechanisms,” Gerard responded. “When the public understands that these exist, as they do in small businesses to recover costs of buying a computer or driving a delivery truck, they recognize that this is different from a subsidy. We think it’s important to remind the public that we don’t receive subsidies. These are cost recovery mechanisms, just as everyone else receives.”

API said the oil and gas federal tax code provisions that the Obama administration wants to repeal, and the revenue it estimates would be raised over 10 years, include the Section 199 manufacturers’ tax credit which would remain available to other industries ($11.6 billion); expensing of intangible drilling costs ($13.9 billion); modifications of rules for dual capacity taxpayers ($10.7 billion); and last in-first out (LIFO) accounting ($25.8 billion).

Other repeals

Also proposed for repeal are the current geologic and geophysical cost 5-year amortization period, which would be replaced with one for seven years ($1.4 billion); percentage depletion ($11.5 billion); and the tertiary injectants deduction ($100 million). The administration also wants to reinstate the chemical waste superfund tax for crude oil and petroleum products, which it estimates would raise $10.5 billion over 10 years, API said.

Geithner said the administration also wants to enact incentives for companies to manufacture more goods domestically, and discourage US companies from moving investments and profits to countries with lower tax rates by imposing a new minimum tax on foreign earnings, stronger safeguards against transfer pricing abuses, and replacing tax deductions US companies now get for relocating overseas with tax credits for expenses when US companies bring operations back home.

“The tax provisions the president has cited are being spun as subsidies, which simply isn’t true,” API Chief Economist John C. Felmy said in a Feb. 22 teleconference. “It’s being talked about as a fairness issue. There’s nothing fair about taking money from oil company owners who are retirees, from an industry because you don’t like it, or from consumers by raising prices.”

API Tax Policy Manager Stephen Comstock, who also participated, told reporters that US House Ways and Means Committee Chairman Dave Camp (R-Mich.) has said he is willing to look at federal tax reform proposals. “But we’re also in an election year,” Comstock continued. “We take all proposals that come from the administration seriously. Whether this one has any traction on Capitol Hill is for other prognosticators to consider, but I’m certain that people up there will take any proposal to improve the economy seriously.”

Gerard said on Feb. 23: “We strongly support corporate tax reform. We would like to work with the administration and congressional leaders to bring the corporate rate down and make it more competitive with other countries. But we oppose proposals which pick winners and losers…. We believe a comprehensive reform should include everybody and not penalize certain industries because you don’t like what they produce.”

Contact Nick Snow at nicks@pennwell.com.

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