Deloitte examines risk of oil, gas tax increases in US
Potential US tax increases related to oil and natural gas operations are likely to vary depending on how and when Congress pursues other tax items on its agenda, now expected for sometime after the upcoming election, the Deloitte Center for Energy Solutions said.
OGJ Senior Staff Writer
HOUSTON, Oct. 8 -- Potential US tax increases related to oil and natural gas operations are likely to vary depending on how and when Congress pursues other tax items on its agenda, now expected for sometime after the upcoming election, the Deloitte Center for Energy Solutions said.
Congress has a long list of unfinished tax business. In addition, energy and jobs legislation remain on the agenda. Lawmakers postponed voting on taxes until after the election. Congress, adjourning for the midterm election, is scheduled to reconvene Nov. 15.
The US Senate plans to handle several nontax issues before the Thanksgiving holiday next month, and a vote on taxes might not come until December. A National Commission on Fiscal Responsibility and Reform created by President Barack Obama is scheduled to report its recommendations for tax and spending reform in early December.
If Congress fails to pass legislation by yearend, tax rates would rise on income, estates, capital gains, and dividends. Corporate tax credits from the Alternative Minimum Tax also are up for renewal.
Deloitte said Congress must weigh mounting concerns about the deficit while it confronts the question of how it will offset the cost of any tax relief it provides. “In such an uncertain environment, how can tax directors of oil and gas companies assess the tax legislative risk facing their companies?”
In a recent report about assessing the risk of oil and gas tax increases, Deloitte said the Obama administration and others have proposed a range of increases that fall into four categories:
• Imposition of excise taxes on oil and gas through reinstating Superfund taxes and increasing the existing Oil Spill Liability Trust Fund (OSLTF), which is financed by an excise tax on crude oil.
• Repeal of longstanding oil and gas tax rules, including the deduction for intangible drilling costs.
• Repeal or modification of other tax rules, such as the production activity deduction.
• Modification of international tax rules, including limitations of deferral and repeal of the dual capacity taxpayer rules.
Congress created the OSLTF in 1986 but did not pass legislation to authorize use of the money or the collection of revenue necessary for its maintenance until after the Exxon Valdez oil spill in Alaska. Former President George H.W. Bush signed the Oil Pollution Act (OPA) into law in August 1990, and authorized use of the OSLTF.
Clint Stretch, Deloitte managing principal for tax policy in Washington, DC, said the oil industry has survived fights over proposed tax increases before, and he listed 1982, 1984, and 1993 as examples.
Deloitte suggests Congress might hesitate to take action that could be seen as jeopardizing the already distressed employment outlook in states along the Gulf of Mexico given regional economic repercussions from the Apr. 20 blowout of BP PLC’s Macondo well, the explosion and fire on Transocean Ltd.’s Deepwater Horizon semisubmersible, and the resulting massive oil spill.
Earlier temporary fishing closures of portions of the gulf and lingering uncertainty about drilling permits and future offshore safety regulations has prompted “significant concern over employment on the Gulf Coast,” Deloitte said.
Stretch believes unemployment and the deficit will make Congress unlikely to propose more tax increases on oil and gas companies to pay for jobs or to support an extension of 2001 and 2003 tax cuts, which are scheduled to expire Dec. 31.
He told OGJ that long-term legislative risks depend in part on the outcome of the mid-term election. In the past, Democrats have been willing to address deficits by raising taxes while Republicans have preferred to look for spending cuts, he said.
“For now, lawmakers likely will follow the path of least resistance and postpone for as long as possible any discussion of additional controversial tax increases, including those affecting the industry,” Stretch said. “Although the outcome of the election is uncertain, a strengthened Republican presence in Congress will make raising taxes harder outside of a process of fundamental budget reform.”
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