The Truth on Oil and Natural Gas 'Subsidies'

Stephen Comstock
Posted January 29, 2014

Contrary to what some in politics, the media and most recently, the president during the State of the Union, have said, the oil and natural gas industry currently receives not one taxpayer “subsidy,” “loophole” or deduction. Since its inception, the U.S. tax code has allowed corporate taxpayers the ability to recover costs. These cost-recovery mechanisms, also known in policy circles as “tax expenditures,” should in no way be confused with “subsidies” – direct government spending or “tax loopholes.”

In fact, America’s oil and natural gas industry is helping reduce America’s income inequality by providing jobs that pay seven times the federal minimum wage. API President and CEO Jack Gerard:

“If the president is serious about combating income inequality, we must take full advantage of the opportunities in energy that are before us. Unfortunately, the president called for increased taxes on the oil and natural gas industry he needs to close the income gap and create jobs. Punishing energy companies by raising taxes is not sound energy policy and could lead to less energy, less government revenue, and fewer jobs. The oil and natural gas industry already contributes $85 million a day to the federal government—a larger contributor of government revenue than any other industry in the United States.”

Below is a list of ordinary and necessary business deductions used by the oil and natural gas industry, and a brief description of why these are not “subsidies”:

Intangible Drilling Costs (IDCs)

• The IDC deduction is a mechanism that allows for the accelerated deduction of drilling costs, such as labor costs, associated with exploration activities (accounting for about 60 to 80 percent of the cost of the well).
• Exploration and production companies can claim a deduction equal to 100 percent of these costs in the year spent. Integrated companies – “Big Oil” – can only deduct 70 percent with the remainder recovered over five years.
• This is a deduction, not a credit or government spending outlay and is no different than the policy behind and treatment of R&D costs, similar to the R&D deduction available for other industries.

Domestic Manufacturer’s Deduction – Section 199

• A deduction (not a credit) equal to 9 percent of income earned from manufacturing, producing, growing or extracting in the United States, is available to every single taxpayer who qualifies in the U.S.
• The oil and gas industry – and only the oil and gas industry – is limited to a 6 percent deduction.

Percentage Depletion

• The percentage depletion deduction is a cost-recovery method that allows taxpayers to recover their lease investment in a mineral interest through a percentage of gross income from a well.
• This is available to all extractive industries (such as gold, iron, clay and others) in the U.S. and is in no way unique to the oil and natural gas industry.
• This depletion method is limited for the oil and gas industry. It is not available to companies that produce oil as well as refine and market it – “Big Oil.”

These and other provisions including Foreign Tax Credit/ Dual Capacity Rules and the LIFO accounting method, both available to all U.S. taxpayers – could appear in the president’s next budget proposal, as they have in past budgets, erroneously called subsidies or loopholes. They would increase taxes on an industrial sector that has supported dynamic job and economic growth and should be rejected.

For more information: www.api.org/tax.