Baucus circulates proposal to change federal taxes on oil, gas

US Senate Finance Committee Chairman Max Baucus (D-Mont.) released a federal tax reform discussion draft that would make intangible drilling costs, tertiary injectant expenses, and geological and geophysical expenses “qualified extraction expenses” similar to research and experiment outlays.

It also would repeal the percentage depletion allowance, another federal tax provision that independent producers consider essential to operations.

The proposed oil and gas tax treatment changes are part of a broader document of suggested cost recovery and tax accounting reforms that Baucus released on Nov. 21. An overview indicated the “qualified extraction expenses” proposal in Sect. 24 and percentage depletion allowance repeal in Sect. 25 are partially based on bills Sen. Robert Menendez (D-NJ) introduced in 2012 and 2013 to “close ‘Big Oil’ tax loopholes.”

The latest discussion draft followed two others covering international tax reform and tax administration. All three are based on bipartisan ideas and incorporate bills introduced by Democrats and Republicans, the committee’s majority staff said.

“America today is using a bloated tax code that was built for businesses close to 30 years ago,” Baucus said. “The code is completely outdated and acting as a brake on economic growth. More must be done to simplify tax rules, lessen the burden on small businesses, and jump-start job growth.”

Seeking comments

He said he asked the Congressional Budget Office to analyze economic depreciation rates of tangible assets. The committee also will accept comments on the cost recovery and accounting rules discussion draft by e-mail at Tax_Reform@Finance.Senate.gov through Jan. 14, 2014.

Groups representing independent producers immediately expressed grave concerns. “To be clear, there are many problems with the nation’s tax code, but when it comes to America’s oil and natural gas industry, the current tax code, refined over the past 100 years, is an example of public policy that actually works,” Independent Petroleum Association of America Pres. Barry Russell said.

“Current tax rules and laws ensure that industry pays its fair share in taxes, which is now one of the most heavily taxed industries in the country,” Russell said, adding, “The current tax code also encourages investment resulting in massive new US energy supplies and millions of jobs. But the Baucus tax plan jeopardizes America’s energy renaissance.”

American Exploration & Production Council Pres. Bruce Thompson said, “Independent oil and gas exploration and production companies should be allowed to continue to deduct their ordinary and necessary business expenses. To limit the ability of these companies to deduct these expenses as they are incurred in the search for and production of oil and natural gas amounts to a job and growth killing tax increase.”

Necessary expenses

Thompson said a recent Wood Mackenzie Ltd. study found that making it no longer possible for upstream independents to deduct what actually are necessary business expenses, and not tax breaks, would cost 190,000 jobs within a year, cut independent producers’ investment spending by $407 billion over 10 years, and reduce energy resource production by 15-20%/year.

Russell noted, “Independent oil and gas producers’ onshore upstream taxes alone generated $67.7 billion in 2010. Removing these tax provisions would lead to less industry activity and could actually generate less in total government revenue,” adding that IPAA plans to submit extensive comments to Baucus on the matter.

Thompson said, “Increasing taxes on an industry that is providing abundant, affordable domestic energy supplies, helping spur economic growth, and moving our nation toward energy independence is not good policy.”

An American Petroleum Institute spokesman said API, which includes refiners and integrated companies as well as producers, was reviewing Baucus’s latest discussion draft.

“America’s oil and gas industry has invested $2 trillion into our economy since 2000 and supports 9.8 million jobs, an increase of 600,000 jobs in just 2 years,” the spokesman said. “Changes to cost recovery and repeal of legitimate accounting methods such as last-in, first-out could unintentionally hit the brakes on America’s energy and manufacturing renaissance. People’s jobs are at stake, so lawmakers had better get the details of tax reform right.”

Contact Nick Snow at nicks@pennwell.com.

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