Energy and Taxes

Tax Reform Needs to Retain Support for American Investment

Independent producers reinvest as much as 150 percent of their U.S. cash flow in new U.S. projects. This investment and reinvestment in America’s vibrant oil and natural gas production sector supports the small businesses and the countless other industries and consumers who benefit from affordable, secure American energy.

The Tax Code Impacts America’s Energy Production. The federal tax code recognizes the concepts of capital formation and capital recovery, encouraging investment in capital-intensive American industries – like oil and natural gas production. This ensures a stable, American energy supply and a vibrant manufacturing base.

The Tax Code Works for American Energy. Federal oil and natural gas tax policy works and results in an increasing amount of American oil and natural gas development – decreasing the United States’ reliance on imported sources of energy for the first time in decades. Any tax reform proposal that eliminates key current tax provisions for independent producers could result in fewer wells drilled and the premature termination of existing wells in the United States.

Common Business Deductions for America’s Independent Producers Are Not Subsidies

Deducting Business Expenses and Receiving Subsidies are Different. Generally, the U.S. Code taxes businesses on net income. Businesses, across sectors of the economy, are taxed on earnings after the costs of doing business (expenses) are deducted. Conversely, subsidies are either targeted reductions of taxes owed or direct payments from the government.

Expensing Drilling Costs. Independent producers may immediately deduct intangible drilling costs (IDCs) associated with developing natural gas and oil that have no salvage value – a provision in the tax code since 1913. IDCs are 65 to 90 percent of the capital expenditures of independent producers. Eliminating IDCs will decrease American jobs and energy production.

Percentage Depletion. All mineral natural resources are eligible for a percentage depletion income tax deduction to reflect the decreasing value of the resource as it is produced. Percentage Depletion allows independent producers to reinvest cash into the expenses of existing wells and redeploy capital to drill new wells. This deduction is highly limited and only applies to smaller independent producers and to royalty owners. These taxpayers – who typically file as individuals – should not be penalized through tax reforms that will result in the loss of these important American natural resource assets.

Passive Loss Exception for Working Interests. The tax code enables working interest owners in oil and natural gas production to achieve some parity between their investments and those of corporate shareholders. Counting any working interest investment losses as active instead of passive allows individual investors to treat the normal business deductions from their investment in the same way as corporations. If tax reform retains the active-passive distinctions, this exception should be continued.

Tax Reform That Impedes American Natural Gas and Oil Production is Bad Policy.

Congress faces a key question – it can either promote or impede oil and natural gas development in the United States. While lower tax rates are an important component of tax reform, America’s independent oil and natural gas producers rely on capital recovery provisions to reinvest back into the U.S. economy. Current Congressional tax reform proposals embrace the concept of encouraging American investment through lower tax rates and faster depreciation of capital assets. As these proposals develop the policies that will shape future American investment, it is essential that they reflect the positive aspects of the current federal tax code that support the production of American oil and natural gas.

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