US producers of oil and gas face new resistance to tax measures that are long overdue. Shrinkage of the federal budget surplus makes Congress unlikely to change taxation in ways that would boost production.
Producers should press the issue anyway. If Congress won't do the right thing on production, what it sacrifices to ephemeral fiscal calculation should at least be clear. There will be other opportunities. And who knows? Politics is full of surprises.
One such surprise-a pleasant one for producers-is the energy legislation passed Aug. 2 by the House of Representatives. The biggest shocker is approval of limited leasing of the Arctic National Wildlife Refuge coastal plain. Less surprising but no less significant is the slate of tax moves favorable to US oil and gas production.
Tax measures
Among the measures, which the producing industry has sought for many years-sometimes with temporary success-are these:
- A tax credit for marginal wells that phases in and out as the price of oil falls and rises.
- Provisions to expand percentage depletion for independent producers, especially for marginal wells.
- Current-year expensing of delay rentals and geological and geophysical costs.
- Treatment benefiting the taxpayer of operating losses from oil and gas production.
- Extension of a credit for producing fuel from unconventional sources.
- Several forms of relief from the alternative minimum tax.
Until last week, these measures stood a better chance than ANWR leasing did of surviving action in the Senate. The outlook darkened, however, under the twin clouds of pessimistic budget projections from the White House Office of Management and Budget and Congressional Budget Office.
The White House foresees a fiscal 2001 surplus of $158 billion. That's down sharply from $281 billion projected earlier in the year. The projection still balances without accounting for Social Security receipts in excess of expenditures. The CBO's projected $153 billion surplus requires a $9 billion encroachment into the politically sensitive Social Security surplus.
Hysteria over this erroneously presumed raid on Social Security dooms tax measures that appear to cost the government money. Under myopic congressional scorekeeping rules, which largely ignore incentive effects, the energy proposal tax measures affecting producers would "cost" the treasury $8 billion over 10 years. Industry foes will say the energy proposal robs Social Security beneficiaries to enrich oil companies.
That's nonsense, of course. But it's what producers face in the looming fight over energy policy.
Incentives are important-and good for government revenues in ways overlooked by congressional methods of fiscal analysis.
In the oil and gas industry, incentives in recent years have spawned economic activity in two areas now making vital contributions to general prosperity, the overall tax base and energy supply. It's activity that otherwise might never have begun.
One incentive is the Alternative Fuel Production Credit created by Section 29 of the Windfall Profit Tax Act of 1980. The credit encouraged development of production technology for coalbed methane and natural gas from tight formations and shale. Those sources now account for 25% of total US gas production and 32% of gas reserves, according to a study by Vello A. Kuuskraa and Brian T. Kuck of Advanced Resources International Inc. The numbers are still rising.
The other incentive is a federal-royalty holiday for production from deep waters of the Gulf of Mexico. Deepwater royalty relief regularly receives credit for bringing the Gulf of Mexico back to life.
Half of the gulf's oil production now comes from deep water, and the share is increasing. Drilling activity in deep water is setting records. The work has yielded one technological marvel after another and created jobs all along the Gulf Coast. And incomes. And tax revenues.
National benefits
Both incentives have produced gains extending far beyond individual companies, states, or regions. They have increased energy supply and lifted measures of economic growth. For the US to have denied itself those benefits on the basis of unidimensional fiscal analysis would have been a mistake.
Not in spite of the shrinking federal surplus but because of it, Congress should enact production incentives in the House energy legislation. The incentives would stimulate work essential to energy supply, economic activity, and growth of the tax base. And the budget would repair itself.
