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TAX FACTS: Oil Group Blasts US Democrats’ Tax Agenda January 4, 2007

Posted by notapundit in Congress, Economic News, Politics, US News.

WASHINGTON (Dow Jones)–U.S. House Democrats’ plan to snatch back billions of dollars worth of tax incentives from Big Oil will reduce domestic production and make the nation more dependent on foreign oil, industry officials say.

The oil industry has been put on the defensive as Democrats plow forward with a plan to swiftly approve an energy bill that would repeal significant oil subsidies and set up a reserve fund for renewable energy. Senate Majority Leader Harry Reid of Nevada said Democrats’ focus on solar, geothermal and other renewable energy would reduce U.S. dependence on foreign oil.

Democrats also want to force oil companies that have been avoiding paying royalties to the federal government to pay up. For example, Rep. Edward Markey, D-Mass., has touted a plan that would bar energy companies from bidding on future drilling contracts in the Gulf of Mexico without first renegotiating flawed 1998 and 1999 leases. Those leases allow oil companies to forgo paying royalties to the federal government.

But, according to oil lobbying group American Petroleum Institute, that proposal would put U.S. oil firms at a disadvantage compared to foreign-based oil companies. It “outsources the Gulf of Mexico to foreign companies,” API Chief Economist John Felmy said Thursday.

House Democrats plan to vote on Jan. 18 to disqualify oil and gas companies from receiving a reduced corporate tax rate provided in the 2004 tax bill, “The American Jobs Creation Act.”

Repealing the tax break would raise between $5 billion to $6 billion in tax revenue over the next decade, a House Democratic aide said.

And Democrats intend to reduce the geological write-off for large energy companies by extending the write-off period to seven years from five years. This would raise about $1 billion in tax revenues over 10 years.

Felmy argued the various tax incentives now being criticized by Democrats were approved by Congress for a reason: to encourage companies to take the risks necessary to produce domestic energy and build infrastructure.

Companies drilling in the Gulf of Mexico’s deep waters, for instance, were allowed to forgo royalty payments because the costs for development in those areas could easily exceed $1 billion before production ever occurred.

“If you take money from the oil industry, you lose the incentives to produce,” said Mark Kibbe, API’s tax policy analyst.

Kibbe argued elimination of the generous geological expense deduction is “essentially a tax increase on those companies.”

“The more we take these things away…we’re going to rely more and more on imported oil,” he said. “They’re not going to bankrupt any of the major oil companies, but they will impact where they produce.”

A top House Democratic aide said the geological expense change would affect a handful of large oil companies with more than $1 billion in gross receipts or half a million barrels a day of production.

This tax break for geological exploration has been whittled back. In the 2006 tax bill to renew reduced capital gains rates, Congress extended the geological expense write-off period to five years from two years for large oil companies, which raised $189 million in tax revenues over 10 years. A shorter write-off period is more valuable to taxpayers.

The change came after President George W. Bush criticized this geologic tax break as unnecessary last spring.

“Record oil prices and large cash flows also mean that Congress has got to understand that these energy companies don’t need unnecessary tax breaks like the write-offs of certain geological and geophysical expenditures, or the use of taxpayers’ money to subsidize energy companies’ research into deep-water drilling,” Bush said in an April 25 speech.

Bush said he wanted Congress to eliminate $2 billion of tax breaks from the federal budget over 10 years. Energy Secretary Samuel Bodman criticized the tax incentives when Congress passed the energy bill in 2005.

However, Felmy and Kibbe argued the oil industry came out as net losers under the Energy Policy Act of 2005’s tax provisions. While the industry received $1 billion in geological and geophysical tax incentives and $400 million worth of incentives for refinery investments, the industry also had to pay $2.5 billion into an oil spill fund, they said.

“So we lost money,” said Felmy.

Democrats also intend to advance a bill sponsored by Rep. Jim McDermott, D-Wash., to deny oil and gas companies a manufacturing tax break from the 2004 tax bill. In that bill, oil and gas companies qualified for a special reduced corporate tax rate of 33% on “domestic manufacturing” activities.

The broader 2004 bill was designed to resolve a dispute with the World Trade Organization over an export tax subsidy for U.S. manufacturers. Congress repealed the export tax break, known as foreign sales corporations, and replaced it with the reduced tax rate for manufacturers.

A senior House Democratic tax aide said oil and gas companies didn’t qualify for the original export tax break but successfully lobbied Republicans to qualify for the new reduced corporate rate.

“Big Oil does not deserve the multi-billion dollar tax subsidy, but Republicans gave it to them, anyway,” McDermott said in a statement last year. Sen. John Kerry, D-Mass., sponsored a similar bill in the Senate.

By Rob Wells and Maya Jackson Randall, Dow Jones Newswires


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