Oil, gas remains a target as Obama enters deficit debate

The oil and gas industry remained a primary tax target as US President Barack Obama took a more active role in federal deficit negotiations on this week.

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, July 1 -- The oil and gas industry remained a primary tax target as US President Barack Obama took a more active role in federal deficit negotiations this week. It may be necessary to cut college scholarship assistance and medical research, compromise food safety, and reduce Medicare benefits “if we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars,” the president said during a news conference.

“Before we ask our seniors to pay more for health care, before we cut our children’s education, before we sacrifice our commitment to the research and innovation that will help create more jobs in the economy, I think it’s only fair to ask an oil company or a corporate jet owner that has done so well to give up a tax break that no other business enjoys,” he maintained.

American Petroleum Institute Pres. Jack N. Gerard immediately urged Obama to take a different approach. “Raising taxes on an industry that already contributes more than $86 million every day to the federal government takes us in the wrong direction,” he said in a June 29 statement. “It could put American jobs at risk, decrease oil and natural gas production, harm millions of retirees who rely on income from energy companies, and actually reduce revenue to the government over time.”

The US is sitting on some of the world’s largest oil and gas reserves, but federal policies keep many of them are off-limits, he noted. “If the government allowed for the responsible development of our own resources at home, we could create over 1 million new American jobs, increase revenues to our government by hundreds of billions of dollars, and significantly increase our energy security by providing 92% of our liquid fuels with help from Canada’s oil sands,” Gerard said.

‘As long as it takes’
Obama said he and Vice-President Joseph R. Biden Jr. would continue to negotiate with Democratic and Republican congressional leaders “for as long as it takes, and we will reach a deal that will require our government to live within its means and give our businesses confidence and get this economy moving.” He also noted that a debt ceiling agreement must be reached by Aug. 2 so the government can continue paying its bills.

When it proposed a fiscal 2012 budget on Feb. 14, the White House’s Office of Management and Budget called for elimination of federal tax incentives for the oil and industry totaling $43.612 billion over 10 years. US producers and refiners operating internationally also would pay an additional $10.758 billion in 2012-21 under modified rules for dual capacity taxpayers under the foreign tax credit.

The biggest single tax increase would be $18.26 billion from repealing the Internal Revenue Code Section 199 domestic manufacturing deduction for oil and gas companies. The deduction, which Congress approved in 2004 as part of the American Jobs Creation Act to help offset foreign government subsidies of competing firms, would continue to apply to other US businesses.

Also proposed were repeals of percentage depletion for oil and gas wells to raise an estimated $11.202 billion over 10 years, expensing for intangible drilling costs for an estimated $12.447 billion, the exception to passive loss limitations for working interests in oil and gas properties for $203 million, and the deduction for tertiary injectants for $92 million. OMB also recommended increasing geological and geophysical amortization for independent producers from five to seven years, which it said would raise $1.408 billion over 10 years.

Washington oil and gas trade associations noted that refiners probably would be hit hardest by losing the Section 199 manufacturers’ tax deduction, while the other proposals would have their biggest impact on independent producers. Proponents soon began to suggest that ways would need to be found to limit the federal oil and gas tax changes to the largest companies.

‘Constant diligence’
Efforts to isolate the industry and mischaracterize its favorable federal tax provisions will keep lobbyists busy as the White House joins federal budget deficit and debt limits discussions the next few weeks. “These negotiations are complicated. A lot of them will take place in secret, and the result will emerge when people walk out of those rooms,” said Lee O. Fuller, vice-president of government relations at the Independent Petroleum Association of America. “These are areas that require constant diligence.”

He told OGJ on June 30 that he didn’t know how much headway the White House is making with congressional Republicans, “but Democrats obviously have decided it makes sense to go after the five biggest oil companies. What I hear the administration describe is the entire package which affects not only the big companies but the entire industry.” Fuller strongly disagrees with suggestions that the oil and gas industry gets tax breaks that other businesses don’t despite obvious differences such as depletion of assets as a result of producing them. “It’s still a legitimate cost. We find that aspect of the negotiations particularly hard to deal with,” he said.

But another Washington energy observer suggested that Obama’s specifically mentioning oil and gas tax provisions as he began to actively participate in budget deficit and debt ceiling discussions was not that important.

“I don’t think it’s very meaningful. They just keep making the same proposals,” said Clint Stretch, managing principal of tax policy for Deloitte in Washington. “The bigger question is whether taxes actually will be raised, and I don’t see Republicans in the House giving in on their refusal to consider any new tax increases. What the president and other Democrats have proposed so far is not new. I don’t see where the dynamic is really changing.”

Fuller said a shorter-term debt extension, with a few cuts that don’t involve entitlements and taxes—the two political parties’ primary concerns—looks more likely. That would mean returning to the problem at the end of 2012 as all of the tax provisions which were extended at the end of 2010 expire, and taxes overall become a broader part of a broader deficit and debt debate as the 112th Congress enters its final days, he said.

Contact Nick Snow at nicks@pennwell.com.

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