U.S. TO BOOST PRODUCTS TAXES, BOLSTER E&P

Oct. 8, 1990
The Bush administration and congressional leaders have agreed on a U.S. deficit cutting plan that would raise the current 9 cents/gal federal gasoline tax to 21 cents/gal by next July 1 and improve the tax climate for exploration and production. Congress now must approve or reject the budget package, which is designed to cut the federal deficit by $40 billion in fiscal 1991 and $500 billion during 5 years. The E&P package, which the administration insisted upon, is the one President Bush

The Bush administration and congressional leaders have agreed on a U.S. deficit cutting plan that would raise the current 9 cents/gal federal gasoline tax to 21 cents/gal by next July 1 and improve the tax climate for exploration and production.

Congress now must approve or reject the budget package, which is designed to cut the federal deficit by $40 billion in fiscal 1991 and $500 billion during 5 years.

E&P INCENTIVES

The E&P package, which the administration insisted upon, is the one President Bush outlined in his last two budget proposals.

Included are a 10% credit on the first $10 million/year/company of spending on intangible drilling costs and a 5% credit on the balance.

The credit could be applied against the regular tax and the minimum tax could not eliminate more than 80% of the tentative minimum tax in any year in conjunction with all credits and losses, and unused credits could be carried forward. It would benefit producers an estimated $200 million/year.

Also included is a 10% credit for new tertiary enhanced recovery projects, which is estimated to help producers $50 million/year.

The agreement would eliminate 80% of current preference items generated by independents' exploratory IDCs under the minimum tax which would cost the government $100 million/year.

And it would repeal a depletion provision that discourages independents and majors from buying and selling properties from each other. It would cost the treasury $50 million/year.

The package of incentives also would extend the non-conventional fuels tax credit and restore its application to tight sands gas. The provision encourages production of gas from coalbeds, biomass, geopressurized brine, and tight formations such as Devonian shale.

The credit had been responsible for a surge of coalbed methane drilling (OGJ, Apr. 16, p. 36). The agreement would restore the credit for tight sands gas, which had been limited by court decisions and Federal Energy Regulatory Commission rulings.

Conferees agreed to extend and modify the 600/gal alcohol fuels tax credit, costing the treasury as much as $500 million/year.

They agreed that during the 1991-95 fiscal years total oil and gas production incentives would not be allowed to cost the government more than $4 billion.

PRODUCTS TAXES

The agreement would increase excise taxes on gasoline, diesel fuel, and special motor fuels by 5 cents/gal next Dec. 1 and another 5 cents/gal by July 1991.

Also, effective Jan. 1, 1991, a 2 cents/gal tax would be imposed on refined products including gasoline, diesel fuel, aviation gasoline, kerosine jet fuel, residual fuel oil, and home heating oil.

Products not used as fuel--asphalt, lubricants, waxes, and feedstocks, for example--would not be taxed. Imported fuels are taxed, and exported fuels are exempt from the tax.

Fuels sold for use in manufacturing, including agriculture, would be exempt from the tax. Manufacturing would be defined to include all steps in the processing, conversion, or fabrication of raw, unfinished, or semifinished materials into a finished article.

The exemption would not apply to things such as transportation, including transportation in connection with manufacturing or agriculture, construction, retail trade, wholesale trade, or financial or other services.

The gasoline tax hike is expected to raise about $10 billion/year or $45 billion during 5 years. The 2 cents general petroleum tax would raise about $2.5 billion/year or 11.8 billion during the period.

REACTIONS

The American Petroleum Institute supported the budget agreement as a step required to control the deficit. "It is in the best interests of the nation to return to fiscal responsibility."

The American Gas Association said it was pleased that budget negotiators abandoned the broad based energy tax proposals in favor of an increase in the federal gasoline tax and a relatively modest 2 cents tax on petroleum products.

"This approach will help promote conservation, improve urban air quality, and will be much less disruptive to the nation's economy," AGA said. "Of equal importance, the gasoline tax proposal directly attacks the chief energy security problem facing the U.S.: ever increasing reliance on unstable oil imports."

The American Automobile Association called the gasoline tax increase "reckless" because it will come in the wake of a 23 cents/gal increase due to higher oil prices.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.