Intangible Costs, Real Benefits

Mark Green
Posted September 18, 2014

Since its inception the U.S. tax code has allowed taxpayers to recover business costs and be taxed only on net income – the idea being that quick recovery of costs would help spur reinvestment and support business expansion. This, in turn, boosts the economy and serves the national interest.

It is working in energy. Because of the cost of drilling wells and the need to invest in a depleting asset, cost recovery and reinvestment is an important part of the reason America has an energy revolution today. Mechanisms like the one for intangible drilling costs (IDC) help support the entrepreneurial risk-taking and investment that keep the revolution going.

And what a revolution: The U.S. has become No. 1 in the world in natural gas production, and it is projected to be No. 1 in oil production next year, according to the International Energy Agency. Energy development is making the U.S. more energy secure, improving our trade ledger and raising America to energy superpower status in the world.

At the same time U.S. energy is creating jobs and driving economic growth. Our industry supports 9.8 million jobs and adds more than $1 trillion to U.S. GDP, accounting for 8 percent of the national total. It is a leader in capital spending in this country, with four oil and natural gas companies landing top-10 spots on the Progressive Policy Institute’s recent list of 2013 spending leaders. That spending – for plants, property and equipment – translates into jobs and fuel for the economy.

We say all of this because some want IDC and other industry tax treatments repealed, which would raises industry taxes. (They apparently didn’t get the memo on the energy revolution and the benefits it is providing the U.S.) Some quick points about tax policy, cost recovery and IDC:

• The oil and natural gas industry currently receives no unique tax credits or deductions.
• Cost recovery mechanisms are not tax credits or direct government subsidies for an industry, because deductions do not reduce the lifetime tax liability of a project. It simply allows oil and natural gas companies to recover their costs more quickly and reinvest in the next well.
• Recovering expenses for IDC – well preparation, drilling and other related costs, which typically represent 60 to 80 percent of the cost of a well – is critically important to maintaining the cash flow needed to keep producing energy and creating jobs.
• Independent producers are permitted to deduct 100 percent of their IDC in the year in which they were incurred. Integrated oil companies are permitted to deduct 70 percent of their IDCs in the year incurred and amortize the remaining 30 percent over five years.

Given the above, it’s not surprising that studies show repealing the IDC deduction would chill investment, likely resulting in lower energy production – a potential loss of 3.8 million barrels of oil equivalent per day by 2023. America would be less energy secure as a result. In addition, repeal of the IDC and other proposed changes affecting only the U.S. oil and natural gas industry could put 75,000 direct U.S. jobs at risk.

The energy revolution is providing a generational opportunity for our country to expand its economy – offering new opportunity for individuals and families alike – while making itself more secure in the world for decades to come. By harnessing its energy wealth, America also can be a muscular ally to her friends around the globe while countering the influence of adversaries.

Key to this emerging narrative is a robust oil and natural gas industry, and America has one. Let’s keep it that way by rejecting tax hikes that would impede a sector that’s working and working for America.