Fulfilling his promise to overhaul America’s tax system, President Donald Trump will soon offer the details of his plan. Though there has been much speculation about who the “winners” and “losers” may be, it seems likely that the oil and gas industry will be one of the targets.
The good news is that the Trump people don’t refer to oil industry profits as “obscene,” as did former President Barack Obama on numerous occasions. Still, some of the allowances and deductions currently available to oil and gas companies could well be reduced or eliminated.
This would be a serious policy mistake. Since 1913, oil and gas companies have been able to expense intangible drilling costs which are much like the research and development deductions enjoyed by other industries. Eliminating this deduction would discourage innovation in the energy sector, thereby jeopardizing valuable advances in oil and gas exploration.
For more than a century, small mineral rights owners have been able to use percentage depletion as a simple way to account for depreciation in the underlying value of their oil and gas resources. Moving to an alternative, such as cost depletion, would mean higher expenses and confusion for individual taxpayers and small companies.
Another possible target is Section 199 of the tax code, enacted in 2004 to help U.S. manufacturers maintain and create high-wage jobs at home. Eliminating this particular deduction could place thousands of jobs at risk by encouraging segments of the oil and gas industry to outsource their work to countries with lower tax rates. It could also result in higher prices for gasoline, diesel, and jet fuel, and it could well increase our dependence on foreign oil after years of steady decline.
One of President Obama’s recurring mantras was that oil and gas companies benefit from billions in unnecessary subsidies. But the industry doesn’t receive subsidies. Rather, like every other industry, they’re allowed to take tax deductions for the expenses they incur. These deductions aren’t the product of special favors. They are the kind of standard relief afforded manufacturers, mining companies and other businesses to help defray the basic costs of operations. For example, oil and gas companies can deduct their expenses for things like equipment purchases and rig-technicians’ salaries. The point of these deductions – as for any other industry or individual – is to ensure taxes are only levied on income after expenses.
In fact, the tax preferences available to the oil and gas industry are quite modest, amounting to less than $3 billion annually. For this minor loss of federal revenue, employment in oil and gas extraction has grown more than 100 percent over the past decade, even with the price collapse of 2014-2015. And while real gross domestic product (GDP) was up only two percent in the first half of this year, value-added by the oil and gas industry jumped more than 20 percent. What’s more, the industry already pays taxes at a higher effective rate than most others and contributes more than $86 million daily to the federal Treasury.
There is one important tax change that would have a positive revenue impact while not discriminating against the domestic energy industry. American consumers benefit when U.S. companies can successfully compete against foreign-owned firms. Unfortunately, the U.S. tax code hampers these efforts by taxing U.S. companies on income earned abroad, money which already incurs foreign taxes. This encourages American companies to “park” their profits abroad. Removing this form of double taxation would repatriate billions of dollars, stimulate U.S. investment in energy and other industries, and generate sizable new tax receipts for the Treasury Department.
Currently, America is the world’s number one natural gas producing country, and within a few years we could also be number one in oil, with all the economic and energy security benefits that would follow. But placing additional tax burdens on America’s oil and gas industry, already one of the most heavily regulated and taxed sectors of the economy, won’t get us there.
[Originally Published at the Houston Chronicle]
Bernard L. Weinstein is Associate Director of the Maguire Energy Institute and an Adjunct Professor of Business Economics in the Cox School of Business at Southern Methodist University in Dallas.
