AMERICANS FOR TAX REFORM ENERGY TAX ANALYSIS
AMERICANS FOR TAX REFORM ENERGY TAX ANALYSIS FEBRUARY 2011
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The President’s Fiscal Year 2012 budget calls for tens of billions of dollars in new taxes, fees and regulations on energy producers and every American family that uses energy. Americans for Tax Reform (ATR) created this informative document which analyzes the following specific niche issues with an energy-tax focus in mind. Authored by Federal Affairs Manger Christopher Prandoni and Federal Affairs Associate Billy Gribbin
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OVERALL FY2011 ENERGY TAX REVIEW WHY TAX CREDITS AREN’T SUBSIDIES AMORTIZATION RATES DEFERRED INTEREST DEDUCTION DUAL CAPACITY TAXPAYERS INTANGIBLE DRILLING COST LIFO EXPLAINED
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MARGINAL WELL TAXATION OIL SPILL LIABILITY TRUST FUND PASSIVE LOSS REPEAL PERCENTAGE DEPLETION IRS SEC. 199 REPEAL SUPERFUND TERTIARY INJECTANTS
ENCHANED OIL RECOVERY CREDIT
Americans for Tax Reform (ATR) is a non-partisan national coalition of taxpayers and taxpayer groups who oppose a federal, state, and local tax increases. ATR is a non-profit 501(c)(4) lobbying organization.
Energy Tax Analysis 2011 2011 Americans for Tax Reform Published by: Americans for Tax Reform 722 12th Street NW, Suite 400 Washington, D.C., 20005 Phone: (202) 785-0266 Fax: (202) 785-0261 www.atr.org For more information contact ATR Communications Director, John Kartch [email protected] Christopher Prandoni and Billy Gribbin, Authors ATR is a nonprofit, 501(c)(4) lobbying organization. Contributions to Americans for Tax Reform are not tax deductible. The Americans for Tax Reform Foundation is a 501(c)(3) research and educational organization. All contributions to the Americans for Tax Reform Foundation are tax deductible to the extent provided for in federal law.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Overall Energy Tax Review Obama Energy Tax Proposals1 The President’s FY 2012 budget contains hundreds of billions of dollars worth of new taxes on energy production and consumption. These taxes will result in higher prices at the pump, increased utility bills and less American energy jobs as companies flee the U.S. to avoid these industry crippling taxes. Below is a breakdown of some of energy taxes Obama supports: Tax Increase Increase Amortization Period Dual Capacity Repeal Percentage Depletion: o Oil and Natural Gas o Hard Minerals Repeal Intangible Drilling and Expensing of Exploration Cost: o Oil and Natural Gas o Hard Mineral IRS Sec. 199 Repeal: o Oil and Natural Gas o Hard Minerals Repeal Tertiary Injectants Superfund LIFO Passive Loss Oil Spill Liability Trust Fund
FY 2012 $59 million $535 million
FY 2012-2021 $1.4 billion $10.8 billion
Industry Impact $1.4 billion $10.8 billion
$607 million $78 million
$11 billion $1.4 billion
$11 billion $1.4 billion
$1.9 billion $78 million
$12.4 billion $1.35 billion
$12.4 billion $1.35 billion
$902 million $20 million $6 million $1.4 billion $2.6 billion* $23 million $35 million
$18 billion $410 million $92 million $20.8 billion $52.9 billion $200 million $451 million
$18 billion $410 million $92 million $10 billion $22.5 billion $200 million $451 million
* Data for FY 2013. 2012 calculations were not applicable.
That’s an energy tax increase of over $90,000,000,000 by 2021! ATR Recommendations2 Congress should fight these new tax increases, and move to rapidly increase access to domestic energy resources in the Eastern Gulf of Mexico, part of the Rocky Mountains, the Atlantic and Pacific Outer Continental Shelves, and ANWR. Among the results of increased access would be: • • • • 1
The immediate creation of 50,000 direct and 120,000 indirect jobs by 2014 The addition of 150,000 direct and 380,000 indirect jobs by 2025 An additional 4 million barrels of oil equivalents per day brought online by 2025 An increase in government revenues of $20 billion by 2020, and $150 billion by 2025
Visit www.atr.org for detailed information about each specific tax provision. All numbers were taken directly from the FY 2012 budget. 2 Projections taken from “Energy Policy at a Crossroads: An Assessment of the Impacts of Increased Access Versus Higher Taxes on U.S. Oil and Natural Gas Production, Government Revenue, and Employment,” published by Wood-Mackenzie Energy Consulting.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Why Tax Credits are not Expenditures or Subsidies With federal spending impelling budget deficits as far as the eye can see, Democrats and their allies on the Left, desperate for revenue, have employed a new tactic in an attempt to hoodwink the American people. The enormously complex tax code is filled with credits, deductions, exemptions, and exclusions which allow taxpayers and businesses to keep a portion of their money they would otherwise be forced to hand over to the government. While these tax policies are less than ideal, they are necessitated by America’s high levels of taxation currently in place. Taking advantage of our convoluted tax code, President Obama has resorted to reasonable, innocuous sounding rhetoric, proposing things like eliminating “backdoor spending in the tax code” by ending “tax subsidies” or “tax expenditures.” In reality, these seemingly middle-of-the-road measures are nothing more than tax increases. Proponents of these tax increases know this, explaining why they go to such great lengths to justify and mask their true nature. Those who argue that tax credits or deductions are subsidies tacitly imply that every dollar earned by a household or business is owed to the government—a blatant affront to our American liberties. To claim that not taking a family’s money—by employing, say, the child tax credit—is a subsidy for a household is entirely inaccurate and misleading. A subsidy is predicated on a government taking money from taxpayer A and giving it to taxpayer B—in this case, allowing taxpayer B to keep more of his earnings by employing a tax credit has no effect on taxpayer A and cannot be considered a “tax subsidy.” To be clear, those claiming that credits and deductions are “subsidies” are doing so to undermine these tax policies’ legitimacy and pave the way for their repeal, which translates to tax increases. In an ideal tax code, the one championed by Americans for Tax Reform, there would be no tax credits and deductions skewing companies and Americans’ natural preferences. Elimination of credits and deductions, however, will need to be part of a comprehensive tax code overhaul which replaces tax credits with lower rates in a revenueneutral way. Viewing tax credits through an accurate lens is essential in combating President Obama’s attempted tax increases. This “subsidy” discussion is pertinent because the Obama 2012 budget unsurprisingly proposes the elimination of a slew of tax credits and deductions for America’s oil and natural gas companies. Unable to win this debate on economic grounds, the President is invoking claims of fairness and equity by decrying America’s energy producers as the recipients of government subsidies. The myth that oil and natural gas companies are the beneficiaries of taxpayer-funded “subsidies” is blatantly false. The effective tax rate for the oil and natural gas industry is 48 percent compared to 28 percent for the rest of Standard and Poor’s industries. This high tax rate explains why in 2008 America’s oil and natural gas producers paid $100 billion in income taxes. In fact, every single day this industry pays $95 million to the federal treasury in rents, royalties and lease payments. As stated in the second clause of ATR’s Taxpayer Protection pledge, signers oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Amortization Period Increase Current Law Oil and natural gas companies employ geological and geophysical (G&G) to locate and gain access to oil and natural gas resources. In an effort to encourage domestic production of oil and natural gas, companies are allowed to deduct many of the activities associated with G&G, such as, surveys, geological studies, and some exploratory drilling tasks. In 2005, geological and geophysical costs were available to be amortized over a two year period, thereby, streamlining exploratory costs. Since then, Congress has twice extended the G&G amortization period to seven years for the largest integrated companies. Now, President Obama is looking to require small, independent energy producers to move to a seven year amortization period. Obama 2012 Budget Increase the amortization period to seven years for will result in a $59 million tax increase for small, independent energy producers in 2012 and a $1.4 billion tax increase by 2021. ATR Analysis Raising taxes on oil and natural gas companies by increasing the amortization period of geological and geophysical (G&G) expenditures will reduce the amount of money available for exploration. During a time of persistently high unemployment, President Obama should be encouraging new developments of oil and natural gas—not quashing pending jobs. Current regulations already inflate the cost of searching for oil and natural gas in the United States: U.S. companies spend $70 to explore and produce each barrel of oil or equivalent of natural gas, compared with the less than $30 spent by foreign companies to explore and produce oil and natural gas abroad, according to the Department of Energy. This discrepancy necessitates the G&G amortization period to bolster American oil and natural gas production. Unsurprisingly, increasing the amortization period would have the unintended, negative effect of discouraging new U.S. production and increasing the nation’s reliance on imported oil.
ATR ENERGY TAX HIKE SERIES OBAMA 2011 BUDGET ANALYSIS Modifying Dual-Capacity Taxpayer Rules Current Law When company X earns income in a country not the United States, the income generated is subject to the country’s system of taxation that it was earned in. When company X wants to bring its profits back to the US—which were already taxed by a foreign country—its profits are taxed again by the US government. In order to keep American companies internationally competitive and to encourage them to bring earnings back to the United States, US tax rules allow for a company to employ a tax credit equal to the amount of income taxes paid to foreign governments. Current US tax policy prevents the double taxation of foreign earnings so that US companies are taxed at the same rates as their international competitors. Obama 2011 Budget The Obama budget includes provisions to modify how dual capacity taxpayers (companies based in the United States that have overseas shops) report income and employ tax credits. Repealing the foreign income tax credit raises American energy companies’ taxes by $10 billion by 2021. ATR Analysis Subjecting American energy companies to double taxation will greatly impact foreign and domestic investments putting American companies at a competitive disadvantage. Modifying international laws to double tax dual-capacity taxpayers only affects US energy companies, resulting in the loss of international markets and reductions in foreign and domestic investment. The U.S. is the only OECD country that employs a world wide system of taxation or, put another way, subject’s foreign earned income to U.S. tax law. Proposals to amend how foreign earned income is treated are a serious threat to American competitiveness and unnecessarily threaten America’s energy producers. International operations are buoyed by domestic U.S. jobs. There are over 9.2 million Americans currently employed by the oil and gas industry, many of which support international projects. Should the President’s rewriting of dual-capacity tax laws be implemented, many companies would be forced to close international shops, and thus, layoff domestic workers.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Repeal Expensing of Intangible Drilling Costs Current Law To encourage oil and natural gas businesses have been given the Expensing IDC has proved vital Expensing costs include: labor, preparation and well construction.
producers to continue development of new wells, these option of expensing Intangible Drilling Costs (IDC). in attracting investment in large, finically risky projects. fuel, repairs, hauling, and supplies necessary for drill
Currently, independent producers can deduct 100 percent of their intangible drilling costs in the year they were incurred while integrated oil companies may deduct 70 percent of their intangible costs in the year they were incurred. Obama 2012 Budget Obama’s budget repeals IDC expensing which increases taxes by $1.9 billion in 2012 and $12.4 billion by 2021. ATR Analysis Since drilling costs are not liquid, mining operations have been allowed to deduct these costs as first year expenses. Without this expensing, investors and oil producers in failed mining operations will never recover savings from unrealized drilling costs deductions. Just like other industries are allowed to expense research for future projects, the IDC deduction allows energy producers to invest and grow. IDC is still applicable and necessary as oil and natural gas producers are taking on more difficult, financially risky drilling ventures. Although, technology has opened up the potential for Lower Tertiary Trend mining, it remains a risky investment for financiers. Should IDC be repealed, as President Obama has proposed, many American oil reserves could remain untapped for lack of investment. Given the amount of oil and natural gas Americans consume, it would be imprudent to discourage investors looking to develop and cultivate American oil reserves. Repealing IDC undermines domestic oil production and increases America’s reliance on foreign oil. Decreased American oil production will inevitably lead to fewer jobs as this will result in declines in development and exploration. Similarly, less oil production will have the unintended consequence of decreasing government revenue.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS LIFO Explained Current Law When companies purchase items to sell, they are accumulating an “inventory.” When a good is sold, the profit is the sales price minus the inventory cost. Since 1938, companies have had a choice when determining which good in their inventory they report as sold. Under “first-in, firstout” (FIFO), the oldest parts of the inventory are what are used to make this determination. Many companies, however, choose to use the “last-in, first-out” (LIFO) method, whereby the newest inventory purchased is what’s used in the profit calculation. The LIFO method is most valuable for companies that see the prices of their inventory rise over time. For example: Company A has a $10 widget it bought several years ago, and a replica of that widget it purchased this year for $12. Company A sells the widget for $15. FIFO inventory gives Company A a profit of $5 ($15-$10). LIFO inventory gives Company A a profit of $3 ($15-$12). Company A then only pays taxes on $3 of profit, not $5. The difference between the FIFO profit ($5) and the LIFO profit ($3) is $2. This $2 becomes part of a “LIFO reserve.” Companies must keep track of this LIFO reserve, which in recent years has been the target of tax increase proposals by members of both political parties. Obama 2012 Budget The FY 2012 Administration Budget looks to eliminate LIFO which would raise taxes by $52.9 billion over ten years. This impact directly raises taxes on the oil and gas industry by $22.5 billion over the next ten years. ATR Analysis Companies should not have to pay taxes on inflation. Yet that is exactly what forcing companies to use FIFO would do. At the very least, companies using a long-standing and perfectlyreasonable inventory accounting standard should not be punished after the fact by being taxed on phantom “reserves.” LIFO is used often by energy companies selling oil or natural gas. Taxing LIFO reserves is an unfair retroactive policy that would require companies to raise capital in order to cover unexpected tax payments. Far from being a tax “gimmick” or “loophole,” forcing companies to switch to FIFO could potentially put smaller oil and natural gas producers out of business.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Enhanced Oil Recovery Credit Current Law Section 43 of the Internal Revenue Code establishes the Enhanced Oil Recovery (EOR) credit. The purpose of this credit is to maximize efficiency in domestic energy production by promoting innovation in the development of pre-existing drill-sites. The credit stands equal to 15% of a company’s yearly EOR costs. Qualification for this Section 43 credit is generally reserved for expensive EOR operations employing uncommon technology or procedures. The credit is tied to the price of oil, and is phased out if this price exceeds an annually adjusted threshold. Obama 2012 Budget The President’s proposed budget would eliminate the EOR credit established by Section 43. ATR Analysis This initiative to repeal the EOR credit is mystifying on several levels. First, the federal government has nothing to gain financially from eliminating the oil industry’s benefit: the new FY 2012 budget proposal shows no net effect, or a negligible effect, upon the nation’s deficit one way or the other. Secondly, the EOR credit encourages companies to realize the full potential of developed resources rather than expanding their field of operations at great cost and possible harm to the environment, a goal that should make the current administration quite supportive. Thirdly, a major EOR technology often employed buy the energy sector is the injection of carbon dioxide as a means of pumping oil from a developed source (see ATR page: Taxes on Tertiary Injectants). This process, far from polluting the landscape, sequesters CO2, preventing its possible contribution to man-made climate change; this too is something that both sides of the aisle should approve. A repeal of the Enhanced Oil Recovery credit will fail to benefit the nation financially, while depriving oil companies of the means to conserve resources, provide cheap energy, and protect the environment.
ATR ENERGY TAX HIKE SERIES OBAMA 2011 BUDGET ANALYSIS
Marginal Well Tax Credit Repeal Current Law Marginal oil wells are those which produce 15 barrels of heavy oil or less per day or those that produce less than 95 percent water and 25 barrels per day or less. Marginal natural gas wells are those which produce 90 Mcf or less in one day. A tax credit is refundable at the rate of $3/barrel for the first three barrels of daily production and $0.50 per Mcf tax credit for the first 18 Mcf of natural gas. The tax credit phases in and out in equal increments as prices fluctuate. Price triggers are based on average annual wellhead prices. Obama 2011 Proposal The FY 2011 Administration Budget, approved and submitted by President Obama, calls for a full repeal of the tax credit for oil and gas produced from marginal wells. ATR Analysis The benefits of this tax credit for smaller producers cannot be overstated. The Department of Energy estimates that the repeal of this tax credit will cost 140,000 barrels of oil per day or a loss of $10.5 million per year. Producers without taxable income for a given year are allowed a 5-year carryback provision which allows oil and natural gas companies to employ the unclaimed credit on taxes paid in previous years. While seemingly unnecessary, the marginal well tax credit allows energy producers to hedge their bets against unprofitable years. Given that 85 percent of all American oil wells and 74 percent of all natural gas wells are classified as marginal wells, repealing this credit could be disastrous for companies during down years. Repealing this credit, which the Obama Administration calculates will net them zero dollars in new revenue, unnecessarily cuts down smaller refiners’ safety nets.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Increase of the Oil Spill Liability Trust Fund Current Law Since the Oil Pollution Act of 1990, there has existed an Oil Spill Liability Trust Fund (OSLTF), a billion-dollar “insurance” against spills which is overseen by the United States Coast Guard's National Pollution Funds Center. The OSLTF expired at the end of 1994 due to a sunset provision in the Act; the Fund was later reinstated by the Energy Policy Act of 2005 The largest source of revenue for the OSLTF is provided by oil companies in the form of a 5cent-per-barrel tax on domestic or imported oil. The collected funds are then used to pay for spill costs not paid directly by the responsible party. The limit to this fund has been set at $1 billion dollars. Obama 2012 Budget The President’s proposed budget raises the per-barrel tax on oil companies, and would deprive the economy of $35 million in 2012, and cost $451 million over the next ten years. ATR Analysis While it is certainly appropriate to hold businesses accountable for applicable damages, an increase in the OSLTF would cost jobs and raise energy prices for consumers. It is an unnecessary addition, one that invites further congressional treatment as a personal slush fund to appease constituents. Furthermore, there is no reason to think that the current system is broken. During the summer of 2010, BP paid $20 billion in damages to the federal government and has pledged to pay all damages it is responsible for. Increasing the OSLTF tax, in fact, may have the adverse effect of diffusing liability amongst all oil producers, thereby, increasing the likelihood of an accident. For the sake of argument, if a company is liable for 90 percent of damages incurred during an accident, it will take more precautionary measures than a company only responsible for 65 percent of damages incurred. In reality, revenue hungry politicians would probably end up raiding the OSLTF once it is flush with cash, just as they do the Highway Trust Fund. Increasing the OSLTF offers no environmental benefits while punishing consumers.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS
Passive Loss Exception Repeal Current Law A generation ago, “tax shelters” were popular and legal tax-avoidance strategies. The most common form a tax shelter took was for an individual to become a limited partner in a partnership that sustained perpetual losses. These losses would be passed along to the partnerinvestor, who would use them to offset other income. There were few restrictions on this practice. With the implementation of the 1986 Tax Reform Act, Congress required “passive losses” (losses incurred by businesses in which the taxpayer didn’t have any material participation) to be carried forward, not used against other income. The losses from the passive activity now can only be realized if the activity eventually turns a profit, or when the investor sells his interest in the activity. Congress made several exceptions to the passive loss rule, though. One of these was a working interest in an oil or gas property. For these investments, the rules are much like they were before 1986. Obama 2012 Budget Repealing the passive loss exception for working interests in oil and gas properties will result in a $23 million tax increase in 2012 and $203 million tax increase by 2021. ATR Analysis The Tax Reform Act’s aim was to prohibit the deduction of passive losses when they are employed in the practice of seeking a tax shelter. However, in the oil and gas business, that is rarely the case. Passive loss is a tax practice which was incepted to alleviate struggling businesses when they are, once again, profitable. Repealing this deduction would stymie struggling companies and is the equivalent of kicking a business while it is down.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Repeal of Percentage Depletion Current Law The IRS defines depletion as “the using up of natural resources by mining, quarrying, drilling, or felling. The depletion deduction allows an owner or operator to account for the reduction of a product’s reserves.” For over a century there have been two ways to calculate deductions: cost depletion and percentage depletion. The preferred method of deduction, percentage depletion, allows the producer to deduct the gross income derived from extracting fossil fuels or other minerals. Originally implemented to encourage domestic development of natural resources, percentage depletion allows for producers to collect a percentage, depending on the resource being mined, of their income tax-free. Traditionally, oil producers have been able to deduct approximately 15% of their income while coal producers are allowed to deduct 10% of their income. Comparatively, sulfur and uranium producers deduct 22%. Obama 2012 Budget • Impact on oil and natural gas: Repealing percentage depletion will raise taxes by $607 million in 2012 and $11. 2 billion by 2021 • Impact on hard mineral fossil fuels (coal): – Repealing percentage depletion will raise taxes by $78 million in 2012 and $1.35 billion by 2021. • Total impact: $12.35 billion in tax increases by 2021 ATR Analysis Mining natural resources continues to be one of the riskiest investments and requires enormous amounts of capital. Furthermore, it may take years to recuperate investments because resource extraction does not begin immediately. Percentage depletion has gone a long way to alleviate the concerns of investors and small companies, its repeal will only add uncertainty to already weary producers. While producers of other minerals (gravel, clay, gold, etc) will be allowed to continue percentage depletion discounts, oil, natural gas and coal producers will face enormous tax increases.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS IRS Sec. 199 Repeal Current Law The Internal Revenue Code (IRC) Section 199, the Domestic Production Activities Deduction, benefits all companies who produce goods on American soil – yet only energy companies are being targeted for cuts in deduction rates. Prior to harmful energy legislation passed in the 110th Congress, businesses engaged in a qualifying production activity were eligible to take a tax deduction of 3% of the profits from this qualifying activity in tax years 2005 and 2006. The deduction increases to 6% of profit in 2007, 2008, 2009, totaling 9% in years 2010 and beyond. However, Democrats have implemented a Sec. 199 “freeze” at 6%--only for oil and natural gas producers—further skewing the market towards non-traditional forms of energy. Obama 2012 Budget • Impact on oil and natural gas: Repealing Sec. 199 will result in a $902 million corporate income tax increase in 2012 and a $18.3 billion tax increase by 2021 • Impact on hard mineral fossil fuels (coal): Repealing Sec. 199 will result in a $20 million corporate income tax increase in 2012 and a $410 million tax increase by 2021 • Total impact: Repealing Sec. 199 will result in an $18.4 billion tax increase by 2021 for America’s energy producers. ATR Analysis Handcuffing America’s most productive energy sources will only lead to higher energy prices for American families. Energy companies do not pay the tax increase prompted by a repeal of Sec. 199, consumers do. This tax will be passed on to every domestic manufacturer, business, and American citizen. Furthermore, repealing of Sec. 199, only for America’s energy producers, undermines the 9.2 million workers that makeup the oil and natural gas industry in the U.S. Disallowing this deduction will harm America’s most vulnerable businesses—domestic manufacturers. Already facing increased competition abroad and punitive EPA regulations, this energy intensive industry might not be able to handle increased energy costs. President Obama should not single out and punish America’s energy producers by repealing the Section 199 tax provision.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Superfund Reinstated Current Law Superfund excise taxes were imposed from 1980-1996. They included a tax on domestic crude oil and imported petroleum products at a rate of $9.7 per barrel, a tax on hazardous chemicals at a varying rate of $0.22 to $4.87 per ton, and a tax on imported substances that use hazardous materials in their production. The Superfund Environmental Income Tax refers to a corporate environmental income tax imposed before January 1, 1996 at a rate of 0.12 percent for corporations whose incomes exceeded $2 million. The revenue from these taxes was assigned to the Hazardous Substance Superfund Trust Fund. Money from the Superfund Trust Fund was available for expenditures related to hazardous substances released into the environment. However, the Superfund was phased out of existence at the end of the Clinton Administration. President Obama, however, wants to reinstate this fund. Obama 2012 Budget The FY 2012 Administration Budget reinstates the Superfund tax which is expected to cost approximately $20.8 billion over the next 10 years. This impact directly raises taxes on the oil and natural gas industry by $10 billion over ten years. ATR Analysis The superfund was conceived as a way to ensure that waste was properly cleaned up from abandoned wells. Since the suspension of this program, however, private companies have proved capable and responsible when it tasked with cleaning up abandoned wells. Paying more than 70 percent of clean-ups, energy producers have proved that a Superfund is unnecessary. The remaining 30 percent of clean-up costs is fronted by a combination of individuals, businesses, and government agencies. Forcing oil companies to pay billions into a Superfund is fundamentally unfair as these businesses are liable for substantially less than they are contributing to the fund. Furthermore, the Superfund has a long history of being a treasure chest for trial lawyers as the Environmental Protection Agency dolls out funds to “victims.” America has taken care of its abandoned wells without the Superfund for the past fifteen years, thereby, proving the Superfund superfluous.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Repealing Tertiary Injectant Deduction Current Law In order to mine inaccessible oil reserves, oil producers inject liquids and gasses into an oil well’s surrounding area—a process called tertiary injection. In order to encourage job-creating development, domestic oil producers are allowed to deduct the costs incurred from the tertiary injection process. Expenses that oil companies claim as deductions are: the cost of acquiring or producing the tertiary injectants, the costs associated with injecting and reinjecting, and the cost of recovering the purchased and produced tertiary injectants. Obama 2012 Budget The administration has proposed to repeal tertiary injectants deductibility status. Doing so would raise taxes on energy producers by $6 million in 2012 and $92 million by 2021. ATR Analysis Changing how tertiary injections are listed under the tax code from “deductible” to “capital” will raise the initial investment required by producers looking to extract oil. Section 193 of the IRS code states that oil producers should be able to deduct “costs related to injecting a substance with a transitory effect on production” and “costs of producing and reinjecting gas or hydrocarbon liquids utilized in a recycling process.” Thus, if tertiary injectant deductions bolstered oil production, as the IRS code explicitly states, then rescinding it will necessarily have the opposite effect, stifling production. The purpose of the deduction is to help producers pay for the high costs associated with tertiary injection. Alleviating concerns about atmospheric CO2, carbon dioxide is often used in the tertiary injection process. Utilizing carbon dioxide in enhanced oil recovery projects is one of the primary ways to prevent carbon dioxide from escaping into the atmosphere; keeping deductions for tertiary injectants encourages this process.
Americans for Tax Reform (ATR) opposes all tax increases as a matter of principle. We believe in a system in which taxes are simpler, flatter, more visible, and lower than they are today. The government's power to control one's life derives from its power to tax. We believe that power should be minimized. ATR was founded in 1985 by Grover Norquist at the request of President Reagan. The flagship project of Americans for Tax Reform is the Taxpayer Protection Pledge, a written promise by legislators and candidates for office that commits them to oppose any effort to increase income taxes on individuals and businesses. Since ATR first sponsored the Pledge in 1986, hundreds of U.S. Representatives, more than fifty U.S. Senators and every successful Republican Presidential candidate have all signed the Pledge. In the 112th Congress, 237 U.S. Representatives and 41 U.S. Senators have taken the Pledge never to raise income taxes. Americans for Tax Reform began promoting the Taxpayer Protection Pledge on the state-level in the early 1990s. ATR works with state taxpayer coalitions in all 50 states to ask candidates for state legislature and constitutional office to sign the State Taxpayer Protection Pledge, which reads: “I _____ pledge to the taxpayers of the __________ district, of the state of __________, and to all the people of this state, that I will oppose and vote against any and all efforts to increase taxes.” Additionally, Americans for Tax Reform works with state-based center-right groups to help replicate ATR’s national Wednesday Meeting in the states. Currently, there are over 50 meetings in 46 states. These meetings bring together a broad cross section of the center-right community- taxpayer groups, social conservative groups, business groups, legislators, etc., to promote limited government ideals. Realizing that Americans not only need to be protected from higher taxes, but from higher spending; Americans for Tax Reform created the Center for Fiscal Accountability (CFA) in 2008. CFA focuses on all central issues related to fiscal responsibility and accountability, especially spending restraint and the promotion of a more transparent and accountable government on the local, state, and federal level through easily searchable online spending and contract databases. Americans for Tax Reform and Americans for Tax Reform Foundation also sponsor the annual calculation of Cost of Government Day (COGD), the day on which Americans stop working to pay the costs of taxation, deficit spending, and regulations by federal and state governments. ATR is a nonprofit, 501(c)(4) lobbying organization. Contributions to Americans for Tax Reform are not tax deductible. The Americans for Tax Reform Foundation is a 501(c)(3) research and educational organization. All contributions to the Americans for Tax Reform Foundation are tax deductible to the extent provided for in federal law.
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The President’s Fiscal Year 2012 budget calls for tens of billions of dollars in new taxes, fees and regulations on energy producers and every American family that uses energy. Americans for Tax Reform (ATR) created this informative document which analyzes the following specific niche issues with an energy-tax focus in mind. Authored by Federal Affairs Manger Christopher Prandoni and Federal Affairs Associate Billy Gribbin
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OVERALL FY2011 ENERGY TAX REVIEW WHY TAX CREDITS AREN’T SUBSIDIES AMORTIZATION RATES DEFERRED INTEREST DEDUCTION DUAL CAPACITY TAXPAYERS INTANGIBLE DRILLING COST LIFO EXPLAINED
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MARGINAL WELL TAXATION OIL SPILL LIABILITY TRUST FUND PASSIVE LOSS REPEAL PERCENTAGE DEPLETION IRS SEC. 199 REPEAL SUPERFUND TERTIARY INJECTANTS
ENCHANED OIL RECOVERY CREDIT
Americans for Tax Reform (ATR) is a non-partisan national coalition of taxpayers and taxpayer groups who oppose a federal, state, and local tax increases. ATR is a non-profit 501(c)(4) lobbying organization.
Energy Tax Analysis 2011 2011 Americans for Tax Reform Published by: Americans for Tax Reform 722 12th Street NW, Suite 400 Washington, D.C., 20005 Phone: (202) 785-0266 Fax: (202) 785-0261 www.atr.org For more information contact ATR Communications Director, John Kartch [email protected] Christopher Prandoni and Billy Gribbin, Authors ATR is a nonprofit, 501(c)(4) lobbying organization. Contributions to Americans for Tax Reform are not tax deductible. The Americans for Tax Reform Foundation is a 501(c)(3) research and educational organization. All contributions to the Americans for Tax Reform Foundation are tax deductible to the extent provided for in federal law.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Overall Energy Tax Review Obama Energy Tax Proposals1 The President’s FY 2012 budget contains hundreds of billions of dollars worth of new taxes on energy production and consumption. These taxes will result in higher prices at the pump, increased utility bills and less American energy jobs as companies flee the U.S. to avoid these industry crippling taxes. Below is a breakdown of some of energy taxes Obama supports: Tax Increase Increase Amortization Period Dual Capacity Repeal Percentage Depletion: o Oil and Natural Gas o Hard Minerals Repeal Intangible Drilling and Expensing of Exploration Cost: o Oil and Natural Gas o Hard Mineral IRS Sec. 199 Repeal: o Oil and Natural Gas o Hard Minerals Repeal Tertiary Injectants Superfund LIFO Passive Loss Oil Spill Liability Trust Fund
FY 2012 $59 million $535 million
FY 2012-2021 $1.4 billion $10.8 billion
Industry Impact $1.4 billion $10.8 billion
$607 million $78 million
$11 billion $1.4 billion
$11 billion $1.4 billion
$1.9 billion $78 million
$12.4 billion $1.35 billion
$12.4 billion $1.35 billion
$902 million $20 million $6 million $1.4 billion $2.6 billion* $23 million $35 million
$18 billion $410 million $92 million $20.8 billion $52.9 billion $200 million $451 million
$18 billion $410 million $92 million $10 billion $22.5 billion $200 million $451 million
* Data for FY 2013. 2012 calculations were not applicable.
That’s an energy tax increase of over $90,000,000,000 by 2021! ATR Recommendations2 Congress should fight these new tax increases, and move to rapidly increase access to domestic energy resources in the Eastern Gulf of Mexico, part of the Rocky Mountains, the Atlantic and Pacific Outer Continental Shelves, and ANWR. Among the results of increased access would be: • • • • 1
The immediate creation of 50,000 direct and 120,000 indirect jobs by 2014 The addition of 150,000 direct and 380,000 indirect jobs by 2025 An additional 4 million barrels of oil equivalents per day brought online by 2025 An increase in government revenues of $20 billion by 2020, and $150 billion by 2025
Visit www.atr.org for detailed information about each specific tax provision. All numbers were taken directly from the FY 2012 budget. 2 Projections taken from “Energy Policy at a Crossroads: An Assessment of the Impacts of Increased Access Versus Higher Taxes on U.S. Oil and Natural Gas Production, Government Revenue, and Employment,” published by Wood-Mackenzie Energy Consulting.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Why Tax Credits are not Expenditures or Subsidies With federal spending impelling budget deficits as far as the eye can see, Democrats and their allies on the Left, desperate for revenue, have employed a new tactic in an attempt to hoodwink the American people. The enormously complex tax code is filled with credits, deductions, exemptions, and exclusions which allow taxpayers and businesses to keep a portion of their money they would otherwise be forced to hand over to the government. While these tax policies are less than ideal, they are necessitated by America’s high levels of taxation currently in place. Taking advantage of our convoluted tax code, President Obama has resorted to reasonable, innocuous sounding rhetoric, proposing things like eliminating “backdoor spending in the tax code” by ending “tax subsidies” or “tax expenditures.” In reality, these seemingly middle-of-the-road measures are nothing more than tax increases. Proponents of these tax increases know this, explaining why they go to such great lengths to justify and mask their true nature. Those who argue that tax credits or deductions are subsidies tacitly imply that every dollar earned by a household or business is owed to the government—a blatant affront to our American liberties. To claim that not taking a family’s money—by employing, say, the child tax credit—is a subsidy for a household is entirely inaccurate and misleading. A subsidy is predicated on a government taking money from taxpayer A and giving it to taxpayer B—in this case, allowing taxpayer B to keep more of his earnings by employing a tax credit has no effect on taxpayer A and cannot be considered a “tax subsidy.” To be clear, those claiming that credits and deductions are “subsidies” are doing so to undermine these tax policies’ legitimacy and pave the way for their repeal, which translates to tax increases. In an ideal tax code, the one championed by Americans for Tax Reform, there would be no tax credits and deductions skewing companies and Americans’ natural preferences. Elimination of credits and deductions, however, will need to be part of a comprehensive tax code overhaul which replaces tax credits with lower rates in a revenueneutral way. Viewing tax credits through an accurate lens is essential in combating President Obama’s attempted tax increases. This “subsidy” discussion is pertinent because the Obama 2012 budget unsurprisingly proposes the elimination of a slew of tax credits and deductions for America’s oil and natural gas companies. Unable to win this debate on economic grounds, the President is invoking claims of fairness and equity by decrying America’s energy producers as the recipients of government subsidies. The myth that oil and natural gas companies are the beneficiaries of taxpayer-funded “subsidies” is blatantly false. The effective tax rate for the oil and natural gas industry is 48 percent compared to 28 percent for the rest of Standard and Poor’s industries. This high tax rate explains why in 2008 America’s oil and natural gas producers paid $100 billion in income taxes. In fact, every single day this industry pays $95 million to the federal treasury in rents, royalties and lease payments. As stated in the second clause of ATR’s Taxpayer Protection pledge, signers oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Amortization Period Increase Current Law Oil and natural gas companies employ geological and geophysical (G&G) to locate and gain access to oil and natural gas resources. In an effort to encourage domestic production of oil and natural gas, companies are allowed to deduct many of the activities associated with G&G, such as, surveys, geological studies, and some exploratory drilling tasks. In 2005, geological and geophysical costs were available to be amortized over a two year period, thereby, streamlining exploratory costs. Since then, Congress has twice extended the G&G amortization period to seven years for the largest integrated companies. Now, President Obama is looking to require small, independent energy producers to move to a seven year amortization period. Obama 2012 Budget Increase the amortization period to seven years for will result in a $59 million tax increase for small, independent energy producers in 2012 and a $1.4 billion tax increase by 2021. ATR Analysis Raising taxes on oil and natural gas companies by increasing the amortization period of geological and geophysical (G&G) expenditures will reduce the amount of money available for exploration. During a time of persistently high unemployment, President Obama should be encouraging new developments of oil and natural gas—not quashing pending jobs. Current regulations already inflate the cost of searching for oil and natural gas in the United States: U.S. companies spend $70 to explore and produce each barrel of oil or equivalent of natural gas, compared with the less than $30 spent by foreign companies to explore and produce oil and natural gas abroad, according to the Department of Energy. This discrepancy necessitates the G&G amortization period to bolster American oil and natural gas production. Unsurprisingly, increasing the amortization period would have the unintended, negative effect of discouraging new U.S. production and increasing the nation’s reliance on imported oil.
ATR ENERGY TAX HIKE SERIES OBAMA 2011 BUDGET ANALYSIS Modifying Dual-Capacity Taxpayer Rules Current Law When company X earns income in a country not the United States, the income generated is subject to the country’s system of taxation that it was earned in. When company X wants to bring its profits back to the US—which were already taxed by a foreign country—its profits are taxed again by the US government. In order to keep American companies internationally competitive and to encourage them to bring earnings back to the United States, US tax rules allow for a company to employ a tax credit equal to the amount of income taxes paid to foreign governments. Current US tax policy prevents the double taxation of foreign earnings so that US companies are taxed at the same rates as their international competitors. Obama 2011 Budget The Obama budget includes provisions to modify how dual capacity taxpayers (companies based in the United States that have overseas shops) report income and employ tax credits. Repealing the foreign income tax credit raises American energy companies’ taxes by $10 billion by 2021. ATR Analysis Subjecting American energy companies to double taxation will greatly impact foreign and domestic investments putting American companies at a competitive disadvantage. Modifying international laws to double tax dual-capacity taxpayers only affects US energy companies, resulting in the loss of international markets and reductions in foreign and domestic investment. The U.S. is the only OECD country that employs a world wide system of taxation or, put another way, subject’s foreign earned income to U.S. tax law. Proposals to amend how foreign earned income is treated are a serious threat to American competitiveness and unnecessarily threaten America’s energy producers. International operations are buoyed by domestic U.S. jobs. There are over 9.2 million Americans currently employed by the oil and gas industry, many of which support international projects. Should the President’s rewriting of dual-capacity tax laws be implemented, many companies would be forced to close international shops, and thus, layoff domestic workers.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Repeal Expensing of Intangible Drilling Costs Current Law To encourage oil and natural gas businesses have been given the Expensing IDC has proved vital Expensing costs include: labor, preparation and well construction.
producers to continue development of new wells, these option of expensing Intangible Drilling Costs (IDC). in attracting investment in large, finically risky projects. fuel, repairs, hauling, and supplies necessary for drill
Currently, independent producers can deduct 100 percent of their intangible drilling costs in the year they were incurred while integrated oil companies may deduct 70 percent of their intangible costs in the year they were incurred. Obama 2012 Budget Obama’s budget repeals IDC expensing which increases taxes by $1.9 billion in 2012 and $12.4 billion by 2021. ATR Analysis Since drilling costs are not liquid, mining operations have been allowed to deduct these costs as first year expenses. Without this expensing, investors and oil producers in failed mining operations will never recover savings from unrealized drilling costs deductions. Just like other industries are allowed to expense research for future projects, the IDC deduction allows energy producers to invest and grow. IDC is still applicable and necessary as oil and natural gas producers are taking on more difficult, financially risky drilling ventures. Although, technology has opened up the potential for Lower Tertiary Trend mining, it remains a risky investment for financiers. Should IDC be repealed, as President Obama has proposed, many American oil reserves could remain untapped for lack of investment. Given the amount of oil and natural gas Americans consume, it would be imprudent to discourage investors looking to develop and cultivate American oil reserves. Repealing IDC undermines domestic oil production and increases America’s reliance on foreign oil. Decreased American oil production will inevitably lead to fewer jobs as this will result in declines in development and exploration. Similarly, less oil production will have the unintended consequence of decreasing government revenue.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS LIFO Explained Current Law When companies purchase items to sell, they are accumulating an “inventory.” When a good is sold, the profit is the sales price minus the inventory cost. Since 1938, companies have had a choice when determining which good in their inventory they report as sold. Under “first-in, firstout” (FIFO), the oldest parts of the inventory are what are used to make this determination. Many companies, however, choose to use the “last-in, first-out” (LIFO) method, whereby the newest inventory purchased is what’s used in the profit calculation. The LIFO method is most valuable for companies that see the prices of their inventory rise over time. For example: Company A has a $10 widget it bought several years ago, and a replica of that widget it purchased this year for $12. Company A sells the widget for $15. FIFO inventory gives Company A a profit of $5 ($15-$10). LIFO inventory gives Company A a profit of $3 ($15-$12). Company A then only pays taxes on $3 of profit, not $5. The difference between the FIFO profit ($5) and the LIFO profit ($3) is $2. This $2 becomes part of a “LIFO reserve.” Companies must keep track of this LIFO reserve, which in recent years has been the target of tax increase proposals by members of both political parties. Obama 2012 Budget The FY 2012 Administration Budget looks to eliminate LIFO which would raise taxes by $52.9 billion over ten years. This impact directly raises taxes on the oil and gas industry by $22.5 billion over the next ten years. ATR Analysis Companies should not have to pay taxes on inflation. Yet that is exactly what forcing companies to use FIFO would do. At the very least, companies using a long-standing and perfectlyreasonable inventory accounting standard should not be punished after the fact by being taxed on phantom “reserves.” LIFO is used often by energy companies selling oil or natural gas. Taxing LIFO reserves is an unfair retroactive policy that would require companies to raise capital in order to cover unexpected tax payments. Far from being a tax “gimmick” or “loophole,” forcing companies to switch to FIFO could potentially put smaller oil and natural gas producers out of business.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Enhanced Oil Recovery Credit Current Law Section 43 of the Internal Revenue Code establishes the Enhanced Oil Recovery (EOR) credit. The purpose of this credit is to maximize efficiency in domestic energy production by promoting innovation in the development of pre-existing drill-sites. The credit stands equal to 15% of a company’s yearly EOR costs. Qualification for this Section 43 credit is generally reserved for expensive EOR operations employing uncommon technology or procedures. The credit is tied to the price of oil, and is phased out if this price exceeds an annually adjusted threshold. Obama 2012 Budget The President’s proposed budget would eliminate the EOR credit established by Section 43. ATR Analysis This initiative to repeal the EOR credit is mystifying on several levels. First, the federal government has nothing to gain financially from eliminating the oil industry’s benefit: the new FY 2012 budget proposal shows no net effect, or a negligible effect, upon the nation’s deficit one way or the other. Secondly, the EOR credit encourages companies to realize the full potential of developed resources rather than expanding their field of operations at great cost and possible harm to the environment, a goal that should make the current administration quite supportive. Thirdly, a major EOR technology often employed buy the energy sector is the injection of carbon dioxide as a means of pumping oil from a developed source (see ATR page: Taxes on Tertiary Injectants). This process, far from polluting the landscape, sequesters CO2, preventing its possible contribution to man-made climate change; this too is something that both sides of the aisle should approve. A repeal of the Enhanced Oil Recovery credit will fail to benefit the nation financially, while depriving oil companies of the means to conserve resources, provide cheap energy, and protect the environment.
ATR ENERGY TAX HIKE SERIES OBAMA 2011 BUDGET ANALYSIS
Marginal Well Tax Credit Repeal Current Law Marginal oil wells are those which produce 15 barrels of heavy oil or less per day or those that produce less than 95 percent water and 25 barrels per day or less. Marginal natural gas wells are those which produce 90 Mcf or less in one day. A tax credit is refundable at the rate of $3/barrel for the first three barrels of daily production and $0.50 per Mcf tax credit for the first 18 Mcf of natural gas. The tax credit phases in and out in equal increments as prices fluctuate. Price triggers are based on average annual wellhead prices. Obama 2011 Proposal The FY 2011 Administration Budget, approved and submitted by President Obama, calls for a full repeal of the tax credit for oil and gas produced from marginal wells. ATR Analysis The benefits of this tax credit for smaller producers cannot be overstated. The Department of Energy estimates that the repeal of this tax credit will cost 140,000 barrels of oil per day or a loss of $10.5 million per year. Producers without taxable income for a given year are allowed a 5-year carryback provision which allows oil and natural gas companies to employ the unclaimed credit on taxes paid in previous years. While seemingly unnecessary, the marginal well tax credit allows energy producers to hedge their bets against unprofitable years. Given that 85 percent of all American oil wells and 74 percent of all natural gas wells are classified as marginal wells, repealing this credit could be disastrous for companies during down years. Repealing this credit, which the Obama Administration calculates will net them zero dollars in new revenue, unnecessarily cuts down smaller refiners’ safety nets.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Increase of the Oil Spill Liability Trust Fund Current Law Since the Oil Pollution Act of 1990, there has existed an Oil Spill Liability Trust Fund (OSLTF), a billion-dollar “insurance” against spills which is overseen by the United States Coast Guard's National Pollution Funds Center. The OSLTF expired at the end of 1994 due to a sunset provision in the Act; the Fund was later reinstated by the Energy Policy Act of 2005 The largest source of revenue for the OSLTF is provided by oil companies in the form of a 5cent-per-barrel tax on domestic or imported oil. The collected funds are then used to pay for spill costs not paid directly by the responsible party. The limit to this fund has been set at $1 billion dollars. Obama 2012 Budget The President’s proposed budget raises the per-barrel tax on oil companies, and would deprive the economy of $35 million in 2012, and cost $451 million over the next ten years. ATR Analysis While it is certainly appropriate to hold businesses accountable for applicable damages, an increase in the OSLTF would cost jobs and raise energy prices for consumers. It is an unnecessary addition, one that invites further congressional treatment as a personal slush fund to appease constituents. Furthermore, there is no reason to think that the current system is broken. During the summer of 2010, BP paid $20 billion in damages to the federal government and has pledged to pay all damages it is responsible for. Increasing the OSLTF tax, in fact, may have the adverse effect of diffusing liability amongst all oil producers, thereby, increasing the likelihood of an accident. For the sake of argument, if a company is liable for 90 percent of damages incurred during an accident, it will take more precautionary measures than a company only responsible for 65 percent of damages incurred. In reality, revenue hungry politicians would probably end up raiding the OSLTF once it is flush with cash, just as they do the Highway Trust Fund. Increasing the OSLTF offers no environmental benefits while punishing consumers.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS
Passive Loss Exception Repeal Current Law A generation ago, “tax shelters” were popular and legal tax-avoidance strategies. The most common form a tax shelter took was for an individual to become a limited partner in a partnership that sustained perpetual losses. These losses would be passed along to the partnerinvestor, who would use them to offset other income. There were few restrictions on this practice. With the implementation of the 1986 Tax Reform Act, Congress required “passive losses” (losses incurred by businesses in which the taxpayer didn’t have any material participation) to be carried forward, not used against other income. The losses from the passive activity now can only be realized if the activity eventually turns a profit, or when the investor sells his interest in the activity. Congress made several exceptions to the passive loss rule, though. One of these was a working interest in an oil or gas property. For these investments, the rules are much like they were before 1986. Obama 2012 Budget Repealing the passive loss exception for working interests in oil and gas properties will result in a $23 million tax increase in 2012 and $203 million tax increase by 2021. ATR Analysis The Tax Reform Act’s aim was to prohibit the deduction of passive losses when they are employed in the practice of seeking a tax shelter. However, in the oil and gas business, that is rarely the case. Passive loss is a tax practice which was incepted to alleviate struggling businesses when they are, once again, profitable. Repealing this deduction would stymie struggling companies and is the equivalent of kicking a business while it is down.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Repeal of Percentage Depletion Current Law The IRS defines depletion as “the using up of natural resources by mining, quarrying, drilling, or felling. The depletion deduction allows an owner or operator to account for the reduction of a product’s reserves.” For over a century there have been two ways to calculate deductions: cost depletion and percentage depletion. The preferred method of deduction, percentage depletion, allows the producer to deduct the gross income derived from extracting fossil fuels or other minerals. Originally implemented to encourage domestic development of natural resources, percentage depletion allows for producers to collect a percentage, depending on the resource being mined, of their income tax-free. Traditionally, oil producers have been able to deduct approximately 15% of their income while coal producers are allowed to deduct 10% of their income. Comparatively, sulfur and uranium producers deduct 22%. Obama 2012 Budget • Impact on oil and natural gas: Repealing percentage depletion will raise taxes by $607 million in 2012 and $11. 2 billion by 2021 • Impact on hard mineral fossil fuels (coal): – Repealing percentage depletion will raise taxes by $78 million in 2012 and $1.35 billion by 2021. • Total impact: $12.35 billion in tax increases by 2021 ATR Analysis Mining natural resources continues to be one of the riskiest investments and requires enormous amounts of capital. Furthermore, it may take years to recuperate investments because resource extraction does not begin immediately. Percentage depletion has gone a long way to alleviate the concerns of investors and small companies, its repeal will only add uncertainty to already weary producers. While producers of other minerals (gravel, clay, gold, etc) will be allowed to continue percentage depletion discounts, oil, natural gas and coal producers will face enormous tax increases.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS IRS Sec. 199 Repeal Current Law The Internal Revenue Code (IRC) Section 199, the Domestic Production Activities Deduction, benefits all companies who produce goods on American soil – yet only energy companies are being targeted for cuts in deduction rates. Prior to harmful energy legislation passed in the 110th Congress, businesses engaged in a qualifying production activity were eligible to take a tax deduction of 3% of the profits from this qualifying activity in tax years 2005 and 2006. The deduction increases to 6% of profit in 2007, 2008, 2009, totaling 9% in years 2010 and beyond. However, Democrats have implemented a Sec. 199 “freeze” at 6%--only for oil and natural gas producers—further skewing the market towards non-traditional forms of energy. Obama 2012 Budget • Impact on oil and natural gas: Repealing Sec. 199 will result in a $902 million corporate income tax increase in 2012 and a $18.3 billion tax increase by 2021 • Impact on hard mineral fossil fuels (coal): Repealing Sec. 199 will result in a $20 million corporate income tax increase in 2012 and a $410 million tax increase by 2021 • Total impact: Repealing Sec. 199 will result in an $18.4 billion tax increase by 2021 for America’s energy producers. ATR Analysis Handcuffing America’s most productive energy sources will only lead to higher energy prices for American families. Energy companies do not pay the tax increase prompted by a repeal of Sec. 199, consumers do. This tax will be passed on to every domestic manufacturer, business, and American citizen. Furthermore, repealing of Sec. 199, only for America’s energy producers, undermines the 9.2 million workers that makeup the oil and natural gas industry in the U.S. Disallowing this deduction will harm America’s most vulnerable businesses—domestic manufacturers. Already facing increased competition abroad and punitive EPA regulations, this energy intensive industry might not be able to handle increased energy costs. President Obama should not single out and punish America’s energy producers by repealing the Section 199 tax provision.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Superfund Reinstated Current Law Superfund excise taxes were imposed from 1980-1996. They included a tax on domestic crude oil and imported petroleum products at a rate of $9.7 per barrel, a tax on hazardous chemicals at a varying rate of $0.22 to $4.87 per ton, and a tax on imported substances that use hazardous materials in their production. The Superfund Environmental Income Tax refers to a corporate environmental income tax imposed before January 1, 1996 at a rate of 0.12 percent for corporations whose incomes exceeded $2 million. The revenue from these taxes was assigned to the Hazardous Substance Superfund Trust Fund. Money from the Superfund Trust Fund was available for expenditures related to hazardous substances released into the environment. However, the Superfund was phased out of existence at the end of the Clinton Administration. President Obama, however, wants to reinstate this fund. Obama 2012 Budget The FY 2012 Administration Budget reinstates the Superfund tax which is expected to cost approximately $20.8 billion over the next 10 years. This impact directly raises taxes on the oil and natural gas industry by $10 billion over ten years. ATR Analysis The superfund was conceived as a way to ensure that waste was properly cleaned up from abandoned wells. Since the suspension of this program, however, private companies have proved capable and responsible when it tasked with cleaning up abandoned wells. Paying more than 70 percent of clean-ups, energy producers have proved that a Superfund is unnecessary. The remaining 30 percent of clean-up costs is fronted by a combination of individuals, businesses, and government agencies. Forcing oil companies to pay billions into a Superfund is fundamentally unfair as these businesses are liable for substantially less than they are contributing to the fund. Furthermore, the Superfund has a long history of being a treasure chest for trial lawyers as the Environmental Protection Agency dolls out funds to “victims.” America has taken care of its abandoned wells without the Superfund for the past fifteen years, thereby, proving the Superfund superfluous.
ATR ENERGY TAX HIKE SERIES OBAMA 2012 BUDGET ANALYSIS Repealing Tertiary Injectant Deduction Current Law In order to mine inaccessible oil reserves, oil producers inject liquids and gasses into an oil well’s surrounding area—a process called tertiary injection. In order to encourage job-creating development, domestic oil producers are allowed to deduct the costs incurred from the tertiary injection process. Expenses that oil companies claim as deductions are: the cost of acquiring or producing the tertiary injectants, the costs associated with injecting and reinjecting, and the cost of recovering the purchased and produced tertiary injectants. Obama 2012 Budget The administration has proposed to repeal tertiary injectants deductibility status. Doing so would raise taxes on energy producers by $6 million in 2012 and $92 million by 2021. ATR Analysis Changing how tertiary injections are listed under the tax code from “deductible” to “capital” will raise the initial investment required by producers looking to extract oil. Section 193 of the IRS code states that oil producers should be able to deduct “costs related to injecting a substance with a transitory effect on production” and “costs of producing and reinjecting gas or hydrocarbon liquids utilized in a recycling process.” Thus, if tertiary injectant deductions bolstered oil production, as the IRS code explicitly states, then rescinding it will necessarily have the opposite effect, stifling production. The purpose of the deduction is to help producers pay for the high costs associated with tertiary injection. Alleviating concerns about atmospheric CO2, carbon dioxide is often used in the tertiary injection process. Utilizing carbon dioxide in enhanced oil recovery projects is one of the primary ways to prevent carbon dioxide from escaping into the atmosphere; keeping deductions for tertiary injectants encourages this process.
Americans for Tax Reform (ATR) opposes all tax increases as a matter of principle. We believe in a system in which taxes are simpler, flatter, more visible, and lower than they are today. The government's power to control one's life derives from its power to tax. We believe that power should be minimized. ATR was founded in 1985 by Grover Norquist at the request of President Reagan. The flagship project of Americans for Tax Reform is the Taxpayer Protection Pledge, a written promise by legislators and candidates for office that commits them to oppose any effort to increase income taxes on individuals and businesses. Since ATR first sponsored the Pledge in 1986, hundreds of U.S. Representatives, more than fifty U.S. Senators and every successful Republican Presidential candidate have all signed the Pledge. In the 112th Congress, 237 U.S. Representatives and 41 U.S. Senators have taken the Pledge never to raise income taxes. Americans for Tax Reform began promoting the Taxpayer Protection Pledge on the state-level in the early 1990s. ATR works with state taxpayer coalitions in all 50 states to ask candidates for state legislature and constitutional office to sign the State Taxpayer Protection Pledge, which reads: “I _____ pledge to the taxpayers of the __________ district, of the state of __________, and to all the people of this state, that I will oppose and vote against any and all efforts to increase taxes.” Additionally, Americans for Tax Reform works with state-based center-right groups to help replicate ATR’s national Wednesday Meeting in the states. Currently, there are over 50 meetings in 46 states. These meetings bring together a broad cross section of the center-right community- taxpayer groups, social conservative groups, business groups, legislators, etc., to promote limited government ideals. Realizing that Americans not only need to be protected from higher taxes, but from higher spending; Americans for Tax Reform created the Center for Fiscal Accountability (CFA) in 2008. CFA focuses on all central issues related to fiscal responsibility and accountability, especially spending restraint and the promotion of a more transparent and accountable government on the local, state, and federal level through easily searchable online spending and contract databases. Americans for Tax Reform and Americans for Tax Reform Foundation also sponsor the annual calculation of Cost of Government Day (COGD), the day on which Americans stop working to pay the costs of taxation, deficit spending, and regulations by federal and state governments. ATR is a nonprofit, 501(c)(4) lobbying organization. Contributions to Americans for Tax Reform are not tax deductible. The Americans for Tax Reform Foundation is a 501(c)(3) research and educational organization. All contributions to the Americans for Tax Reform Foundation are tax deductible to the extent provided for in federal law.
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