Tax provisions critical for American independent oil and natural gas producers

01/23/2014 12:00 AM

08/08/2014 10:21 AM

As the American economy continues to struggle for recovery, policymakers and the public need to be aware of the key advantages available to our nation through increased domestic oil and natural gas production.

A recent Harris Interactive poll shows that American voters see great value in a strong domestic energy sector. Nine out of 10 respondents said that developing more domestic energy here in the U.S. is important, and 73 percent support increased domestic oil and natural gas production.

Unfortunately, discussions taking place in Washington threaten to put the strength of American energy at risk. Whenever the debate in Washington turns to spending and debt, some policymakers repeatedly haul out proposals for tax increases on oil and natural gas.

This is not a popular idea, according to the poll, which found 81 percent of voters nationwide believe policymakers in Washington should solve the nation’s budget issues without raising energy taxes.

Tax reform is another area where voters are wary of the potential for harm to U.S. energy production and energy security. When asked about tax reform, 56 percent of voters said they opposed changes to the tax code that could decrease investment in energy production and reduce energy development in the U.S., versus 30 percent who said they would support such actions.

Tax reform may help keep America competitive in a global marketplace, but it must be done carefully. Cost recovery measures, like the percentage depletion deduction and the intangible drilling costs (IDCs) deduction, are neither subsidies nor loopholes, but tax provisions critical for American independent oil and natural gas producers to sustain capital availability and formation to promote continued oil and natural gas exploration and production activity. By improving cash flow, these cost recovery measures allow American independent producers to invest more money into creating jobs and producing the energy that keeps our economy running.

For some companies in the retail and service sectors, reduced marginal rates might outweigh the loss of deductions that allow a business to recover costs. But for capital-intensive industries such as oil and natural gas or manufacturing, cash flow and cost recovery will typically be very important factors in how they decide to invest in their operations.

Recent studies show that repealing percentage depletion and IDCs would result in fewer wells drilled, fewer Americans employed, and less energy produced in the U.S.

This impact is both significant and immediate. According to studies, over 190,000 Americans would be unemployed within one year if percentage depletion and IDCs were repealed; the number would grow to 265,000 jobs lost over a decade. For states where independent oil and natural gas producers are responsible for the majority of production (like Kansas), oil and natural gas production could fall by as much as 60 percent and industry workforce could fall by as much as 33 percent.

That kind of impact would be almost impossible to offset by lowering marginal rates.

Tax reform that damages cost recovery measures like percentage depletion and IDCs in order to pay for lower rates could hit the brakes on America’s energy and manufacturing revolution. It makes no sense to target for higher taxes an industry that is an engine of job creation and revenue generation.

The American oil and natural gas industry has the power to help our slow-growth economy. If federal government tax and regulatory policies would encourage more development of our nation’s ample oil and natural gas resources, the oil and natural gas industry could invest more, create more American jobs, increase revenue to government, and produce more of the energy we consume.

That’s the kind of bipartisan solution that’s needed in Washington today.

Making the right decisions on energy is so important for our nation’s energy future. Energy access, not taxes, remains the key to moving our nation toward energy independence and unlocking new jobs for Americans.

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