Former Sen. Bill Bradley has tossed tax treatment of oil and gas production onto the glowing coals of presidential politics. Once again, the producing industry must prepare to defend tax provisions peculiar to its activities against charges of preferential treatment.
Bradley, seeking to become the Democratic candidate for the presidency, added oil and gas tax provisions to a hit-list he spelled out during a Jan. 4 forum in Bedford, NH.
The targets
One of the former New Jersey lawmaker's targets is what he described as "the provision that allows certain oil and gas producers, as well as hardrock miners, to claim an up-front tax deduction for exploration and development costs." He put this poorly defined provision in the category of "subsidies for activities harmful to the environment."
He also promised to act on two oil and gas tax measures that he counted among "special interest provisions enacted after beneficiaries made large soft-money donations to national political party committees." One such provision is repeal of intangible drilling costs (IDCs) as tax preferences subject to the alternative minimum tax (AMT). The other is the 15% credit for enhanced oil recovery.
"In the last decade," Bradley said, "oil companies contributed nearly $22 million in soft money to both Republican and Democratic committees." The term "soft money" refers to contributions made to political groups, which aren't subject to limits on contributions to individual candidates.
Politically, this is brilliant. The fusion of "tax loopholes," environmentalism, and campaign funding by "special interests" will no doubt resonate among populist liberals. Yet Bradley's claims are absurd.
The up-front tax deduction to which he refers must be percentage depletion, a legitimate tool of capital recovery available only to independent companies on a limited amount of production. It is no subsidy. And the drilling and producing industries should recoil at Bradley's flip dismissal of their work as activities harmful to the environment. Do the efforts and funds that the industry has spent on environmental protection over the past several decades count for nothing?
Bradley's other implication-that companies spent $22 million over a decade on the AMT exclusion and EOR credit-is simply nonsense. That the companies spent that much money in 10 years' time is probably true. The fact of modern politics is that they must make political contributions in order to be able to defend their interests against an activist government's sometimes-misguided lurches. There's nothing wrong with that.
The fact is that AMT relief and the EOR credit were hardly the only issues of concern to the oil and gas industry in the past decade, or even the major ones. To suggest, as Bradley does, that the $22 million bought those measures amounts to deception uncharacteristic of the candidate.
Furthermore, his facts are wrong. He says, for example, the AMT adjustment for IDCs occurred in 1990 and had the effect of "leaving only 40% of their [operators'] income subject to the AMT." The adjustment actually was part of the Energy Policy Act of 1992. The 40% limit was not a ceiling on tax liability but rather a lid on the amount by which repeal of IDCs as a tax preference can reduce income subject to the AMT. And the measure applies only to independent producers, to whom it was very important but who certainly did not account for all or even most of the $22 million in political contributions.
Exploiting complexity
The damage is done, though. Bradley has smeared the producing industry as a politically coddled special interest that harms the environment. And he has cast undue suspicion on tax-law adaptations to a high-risk business oriented to exploration for wasting assets that pose unusual problems of measurement and have negligible salvage value.
This is political exploitation of industry complexity. Bradley should know better.
