Fear is rising in oil industry that tax breaks would be axed in reform bill

Source: Nick Juliano, E&E reporter • Posted: Thursday, October 31, 2013

Oil and natural gas lobbyists have spent more than a year urging lawmakers to maintain targeted tax breaks for extracting and transporting their products, but there are signs of a growing fear within the industry that impending legislation to overhaul the tax code for the first time in a generation would eliminate most of those incentives in order to lower the top-line rate paid by all companies.

It’s a tradeoff that fits into the framework House Ways and Means Chairman Dave Camp (R-Mich.) outlined as he embarked on the tax reform effort: Eliminate almost all targeted tax loopholes, subsidies, deductions and credits in order to bring the corporate rate down around 25 percent. And it’s one that oil and gas firms have been especially adamant about not wanting to make; a leading industry lobbyist yesterday reiterated that it would be “almost impossible” for lower rates to make up for losing a key tax benefit.

Comprehensive tax reform is not the first threat to incentives enjoyed by oil and gas companies, such as the ability to deduct “intangible drilling costs” (IDCs) and deductions they claim by being classified as “manufacturers.” The Obama administration and its congressional allies have pushed countless proposals to eliminate those provisions in isolation — all of which have been easily defeated by a combination of House Republicans and oil-state Democrats.

But there is a growing sense that Camp and his fellow tax reformers are serious about curtailing the oil industry breaks this time around. Little is known for sure, and the oil industry remains one of the most powerful interest groups in Washington, with no shortage of allies on both sides of the aisle, across the Capitol and around town, meaning that the latest warnings could prove to be sky-is-falling worries that ultimately don’t pan out.

Furthermore, tax reform will be perhaps the most difficult task for lawmakers this session, and there are plenty of reasons to expect the process will not be completed by the time the 113th Congress gavels to a close at the end of next year.

Nonetheless, industry lobbyists appear to be picking up their activity ahead of a committee markup of tax reform legislation expected before the end of this year, and a palpable fear is evident.

“They are all terrified,” one conservative lobbyist who works on tax and energy issues said of the feeling within the oil industry.

Rumors are swirling within the industry that Camp’s working draft would take a bite out of the industry’s most prized tax breaks

“We do know these items are in the mix; people have been talking about them,” said Stephen Comstock, director of tax and accounting for the American Petroleum Institute. “We do not have a clear picture on that, but we do hear snippets that this is being brought up or that is being discussed.”

Among the changes expected by other lobbyists, Camp’s bill could completely eliminate the so-called Section 199 manufacturing credit, which applies to oil and gas producers along with a variety of other U.S. manufacturers, and would end “last in, first out” accounting rules, according to two lobbyists tracking the process. Industry sources also fear an end to or substantial modification of percentage depletion and IDC incentives enjoyed by the oil industry.

“The intangibles question is one that they do keep churning over,” Pete Sepp, executive vice president of the National Taxpayers Union, said of congressional aides working on tax reform. “You could almost see some discussion trying to equate intangibles across various industries and how best to separate what’s truly intangible from what’s more concrete as an expense — so there you might see a discussion over IDC.”

Still, the industry does not lack defenders on the Ways and Means Committee, such as Rep. Kevin Brady (R-Texas), who earlier this year led an energy-tax working group and has voiced support for the “cost recovery” provisions enjoyed by the oil and gas industry. In a brief interview this week, Brady said a lot of work remained before a tax reform package could be unveiled but stressed that he is “confident” the resulting package will help the industry.

“There’s a lot of provisions out there that are floated — a lot of conjecture, a lot of discussion. But Republicans are pro-energy because it’s such a huge job creator,” Brady told E&E Daily. “So [the tax reform bill is] going to be pro-energy.”

Brady acknowledged the underlying tension in the need to ensure that the amount of money collected by the government remains constant even as rates are lowered. That would be accomplished by eliminating targeted breaks, and the process is heavily influenced by Joint Committee on Taxation estimates that typically conclude that the oil industry’s existing breaks end up depriving the government of tax revenue. However, Brady said the industry’s role in spurring the broader economy also should be taken into account

“I think everyone recognizes there is sometimes a tension between JCT scores and the economic growth that we’ve already seen from energy that’s proven and by the way critical right now,” he said. “The last thing we should do is cut short this energy revolution because it has such game-changing impacts on our country.”

A committee spokeswoman declined to comment on specific provisions being discussed.

“The chairman has long said that critical to fixing our broken tax code is starting with a ‘clean sheet’ so that Congress can conduct a top-to-bottom review of the code and determine what ought to go back in, and while members are going through that process now, no final decisions have been made,” she said.

Trade associations representing the oil industry are pressing their case in public and behind the scenes. Last week, API, the Independent Petroleum Producers of America and the American Exploration and Production Council briefed a few dozen staffers on the economic impacts of reversing their tax breaks.

API followed up yesterday with a public release of polling data featuring artfully worded questions that resulted in majorities of voters saying they would oppose tax “changes that could decrease investment in energy production and reduce energy development here in the U.S.”

The group also held a press conference call with Comstock, who pointed back to findings of an API-backed study earlier this summer that concluded ending the IDC deduction would lead to hundreds of thousands of fewer jobs, more than 10,000 fewer wells drilled, a loss of hundreds of billions of dollars of investment and a 14 percent drop in oil and gas production over the decade.

“That kind of impact would be almost impossible to offset just by lowering marginal tax rates,” Comstock said, warning that a tax reform bill that traded IDC for lower rates could “unintentionally hit the brakes on America’s energy and manufacturing renaissance.”