Alex Mills
By Alex Mills
The federal tax code is voluminous and complicated. Just about everyone who has filed a federal income tax return knows how complicated it can be.
However, attempts to simplify and shorten the tax code have failed time and time again, because the tax laws and regulations have been used over and over again to encourage or discourage economic activity.
For example, the tax laws allow for the deduction of interest payments after purchasing a home. This deduction is designed to create economic activity in the housing markets. It has worked.
The same holds true for energy tax policy as it relates to oil and gas. The two primary oil and gas provisions used by independent oil and gas producing companies are intangible drilling costs and percentage depletion. Both of these provisions have been around for almost 100 years, and they have been examined and debated numerous times by members of Congress. Even though Congress has modified these provisions, they remain on the books because they, too, have worked.
Intangible drilling costs (IDCs) allows the deduction of certain expenses that have no resale value in the year they occur. These are such things as drilling rig costs, construction of roads, etc. The federal government does not write the production company a check. It simply allows the company to deduct these expenses in the year incurred rather than requiring the company to amortize the expenses over a four- or seven-year period.
Percentage depletion is similar to expensing of IDCs in that small companies compose the primary sector of the economy that is allowed to use percentage depletion. Originally Congress set percentage depletion at 27 ½ percent for all companies. Over the years that rate has been reduced to 15 percent and limited to only independent oil and gas producers that have less than 1,000 barrels a day of production. Additionally, depletion is limited to 65 percent of taxable income.
Both of these provisions are very important to independents who drill 95 percent of the wells in the U.S. The oil and gas business is a high-risk venture that costs millions of dollars up front. A well that cost $500,000 10 years ago could easily cost $5 million today. Many of these independents had to find private investors to fund their drilling programs.
IDCs and percentage depletion became a topic of conversation again on Sept. 17 as the Senate Finance Committee, under its new Chairman Ron Wyden (D-Oregon), held a hearing on energy tax policy.
Wyden wants to determine the cost and benefits of each energy source and relate that to tax policy. “I believe the list of factors must include considerations that don’t always figure in today, such as energy efficiency, affordability, pollution, and sustainability,” Wyden said.
“Second, it’s past time to replace today’s crazy quilt of more than 40 energy tax incentives with a modern, technology-neutral approach,” he said.
Wyden later clarified what he meant when he said: “Energy tax reform must be part of an overall strategy to move the country toward a clean energy future.”
Sounds like the new chairman has his heart set on using the tax code to encourage modern technology in the “clean energy” arena rather than on proven, reliable fossil fuels.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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