A supercommittee fight

Aug. 29, 2011
Representatives of the US oil and gas industry should greet the new budget supercommittee in Congress with a preemptive offer.

Representatives of the US oil and gas industry should greet the new budget supercommittee in Congress with a preemptive offer. They should do so in the spirit of "shared sacrifice" evoked so frequently by politicians looking for cultural villains—millionaires, billionaires, oil companies—to tax. The magnanimity might earn some measure of respectability from the news media and public.

The offer? Accept the change in percentage depletion proposed in the Close Big Oil Tax Loopholes Act of 2011. The percentage depletion allowance was among tax measures the act would have denied the five largest oil companies based in the US. Now, with the supercommittee beginning work soon, those companies should foreswear the incentive. Their gesture would infuse the proceedings with a sense of compromise. It might summon committee members to long lost bipartisanship. It might even keep the committee from doing real damage.

Tax adaptations

Tax-law adaptations to the oil industry's peculiarities will be back in play when the supercommittee starts exploring ways to lower the federal budget deficit by $1.5 trillion. The "loopholes" assault, which failed in the Senate last May, borrowed from a longer list of tax measures appearing in each of President Barack Obama's budget proposals—measures not limited to the largest oil companies. When the loopholes legislation stalled, supporters promised to revive the mischief.

Supercommittee deliberations are the next battleground. Senate Majority Leader Harry Reid is reported to want a budget deal that focuses on job creation and includes action on energy. This hope obviously attaches to Obama's strategy of taxing fossil energy to fund subsidies for nonfossil energy, spending on which is supposed to create jobs. Budget documents accompanying the president's budget proposals make the formulation explicit. Reid's allusions to job creation and energy come straight from the Obama raid on fossil energy.

Close ahead, then, lies another wave of recrimination against oil and gas "subsidies." Congressional demagogues easily mischaracterize tax mechanisms unique to the oil and gas industry as special favors, even subsidies. They know most members of the public don't understand why the industry, drilling in particular, needs special tax treatment. Many lawmakers themselves don't appreciate how tax law evolved to accommodate a capital-intensive activity in which most investment is for perishable materials and services and for which the principal source of revenue is a wasting natural resource with unpredictable ultimate value.

In fact, most lawmakers apparently know little about these subjects. Ignorance was evident in the ill-fated loopholes legislation. Percentage depletion was one of five tax measures targeted for denial to the biggest oil and gas companies. Reid called the measures "taxpayer-funded giveaways to oil companies that are raking in billions of dollars in profits." Yet all but one of the other measures—a low-cost credit for injectants used in tertiary oil recovery—either are available to other industries or already are restricted for large oil and gas companies. And large integrated oil and gas companies haven't been able to use percentage depletion for tax purposes since 1975.

The industry, therefore, can preemptively surrender percentage depletion without harming stockholders of its largest companies or compromising energy supply. And the grand strategists of Congress—caught up, as always, in their quest to slay populist dragons—would be none the wiser if no one told them.

Persistent threat

The fight, though, wouldn't end with nonsacrificial sacrifice. Percentage depletion is important to the small independent producers and royalty owners who can use it—small businesses and individuals not making those "billions of dollars in profits." It's part of a full slate of tax mechanisms under persistent threat. The package includes parts important to all oil and gas companies, refiners as well as producers, of all size. When one incentive faces a knife brandished by politicians unable or unwilling to make crucial distinctions, all incentives come under threat.

An important fight thus looms in the budget supercommittee. Prevailing will require a united effort by the whole industry.

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