Monday, May 25, 2009

How the Treasury justifies those proposed new oil taxes

Anyone who lives and works in Washington quickly learns that, as with Alice in Lewis Carroll’s Through the Looking Glass, periodically “things get curiouser and curiouser.” It started most recently for me at an otherwise routine hearing this past Wednesday of the congressional Joint Economic Committee when its ranking House minority member, Kevin P. Brady (R-Tex.), made his opening statement.

After noting that new exploration and technologies can significantly expand economically recoverable oil and gas reserves, Brady said that the Obama administration, instead of encouraging more US production, “has placed excessive limits on exploration and drilling, including effectively making offshore drilling impossible in many areas.

“The administration would further penalize oil and gas production and move more energy jobs offshore by the imposition of a variety of new energy taxes,” he continued. “The [US] Treasury justifies these tax increases by arguing that lower taxation under current law ‘encourages overproduction of oil and gas, and is detrimental to long-term energy security,’ at least partly because it boosts ‘more investment in the oil and gas industry than would occur under a neutral system.’

“With all due respect, a policy designed to suppress US oil and gas production is absurd,” Brady maintained. The Treasury further notes that the lower taxation under current law also is not consistent with the administration’s policy of reducing carbon permissions and encouraging the use of renewable energy sources through a cap-and-trade program, he added.

I put much of his statement in my writeup of the hearing, which examined impacts of last year’s record oil prices on the US economy and the potential effect of higher oil prices on its budding recovery this spring. I also made a mental note to find out exactly where the Treasury said that financial incentives such as tax exemptions for marginal wells and the 15% credit for enhanced recovery costs distorts markets by encouraging too much domestic production.

Lou Pugliarisi, president of the Energy Policy Research Foundation Inc., beat me to it. After exchanging e-mails, he sent me a copy of the Treasury Department’s May 2009 Green Book (formally, “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals”), where I found the following phrase as justification for each of the proposed tax changes:

“The [policy], like other oil and gas preferences the administration proposes to repeal, distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent the [policy] encourages overproduction of oil, it is detrimental to long-term energy security and is also inconsistent with the administration’s policy of reducing carbon emissions and encouraging the use of renewable energy sources through a cap-and-trade program. Moreover, the [policy] must ultimately be financed with taxes that result in underinvestment in other, potentially more productive, areas of the economy.”

It’s on Page 60 under repealing the EOR projects credit, on Page 61 under repealing the stripper well tax credit, on Page 63 under repealing expensing of intangible drilling costs, on Page 64 under repealing the tertiary injectants deduction, on Page 65 under repealing the passive loss exception for working interests in oil and gas properties, on Pages 66 and 67 under repealing percentage depletion, on Page 68 under repealing the domestic manufacturing deduction for oil and gas production, and on Page 69 under adding two years to geological and geophysical cost amortization.

It’s not on Page 70 under eliminating the advanced earned income tax credit. That’s the only oil and gas tax increase where the Treasury Department uses another justification (basically, that advance payments have become very unpopular among eligible taxpayers, and recent evidence shows significant numbers of employers and workers don’t comply with its provisions).

On the eight others, it essentially states that the existing policy provides a lower tax rate to a favored income source. I’ll leave it to others to suggest that this simply might be a case of substituting one bias for another.


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