Biden Tax Proposal Targets Major E&P Deductions

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President Joe Biden's wide-ranging tax proposal includes a plan to scrap tax benefits for the oil and gas industry, which presumably includes deductions often claimed by gas producers. If the proposed changes are approved by Congress, they could put a financial squeeze on upstream spending. The proposal from Biden's Department of the Treasury wasn't specific about which tax measures it is placing on the chopping block, but it is likely targeting eight deductions written specifically for the oil and gas industry. Many have been part of the US tax code since the early 1900s. The plan says the industry's tax benefits "shift our energy production away from cleaner alternatives, undermining long-term energy independence and the fight against climate change." What's at Stake The most valuable deductions, by dollar amount, cover the expensing of intangible drilling costs (IDC) and percentage depletion of wells. The IDC deduction, for example, allows producers to write off costs from their taxable income that do not have salvageable value and are not part of a final operating well. This can include the costs of labor, fuel, hauling, drainage and other items that can’t be recouped. Similar tax benefits are also available to the industry in the form of deductions for marginal wells, tertiary injectants, geophysical costs and enhanced oil recovery, and exemptions to business tax rules governing passive loss and publicly traded partnerships. All eight tax deductions were worth a combined $1.2 billion in fiscal year 2019, according to the latest government estimates. Treasury's plan argues that fossil fuel companies benefit from "substantial implicit subsidies" since they don't pay for climate damages caused by the burning of their products. "Subsidized fossil fuels have also negatively impacted air and water quality in US communities -- especially in communities of color," the proposal adds. Jeff Eshelman, COO of the Independent Petroleum Association of America, said a repeal of the tax benefits would "hurt the thousands of small producers," not Big Oil. "Despite misplaced rhetoric of 'tax breaks' and 'giveaways,' America’s oil and natural gas producers do not receive a single dollar in government subsidies," he said in an emailed statement. "In fact, deductions provided to independent oil and natural gas producers are no different than those provided to technology companies for research and development, farmers for fertilizer, and manufacturers for steel and pipe." While Treasury didn't mention the tax benefits it is eyeing for repeal, its intentions are clear judging by the way the plan is characterized -- and by the footnotes tucked in the proposal. One footnote refers to an academic paper that examined the impacts on US energy production if three tax deductions were ended -- the write-offs for IDCs, percentage depletion and domestic manufacturing. Congress' Call Biden said during the presidential election that he would allow “no more subsidies” for any fossil fuels, but decisions on federal tax policy ultimately rest with Congress. Former President Barack Obama tried unsuccessfully to scrap the eight oil and gas tax deductions, the LIFO method and similar measures in his annual budget requests. The political landscape may be different now that climate change has risen in urgency, but scrapping incentives for any industry may be tough right now given the current focus on economic recovery. Conceivably, ending the industry's tax deductions would free up federal funds that Biden could leverage as a way to pay for his ambitious infrastructure package, which he is hoping will include hefty spending on low-carbon technologies. Biden is eyeing an increase in the corporate tax burden as an option to pay for the plan, but said last week said he is “willing to negotiate” on various options. Energy Secretary Jennifer Granholm said alternatives are being floated by Republican lawmakers that the administration will consider. Lauren Craft and Emily Meredith, Washington

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