Tax hikes on energy will hurt the economy and America’s competitiveness

Looking for ways to help pay for his $1 trillion infrastructure plan, President Biden has aimed his sights at the oil and gas industry. Among other proposals, the administration wants to raise the corporate tax rate from 21 percent to 28 percent and replace fossil fuel “subsidies” with clean energy incentives. Proponents estimate that eliminating these subsidies would yield more than $35 billion in tax receipts that could be funneled to renewable energy projects. In addition, congressional Democrats are drafting legislation that would tax big oil companies that released the most greenhouse gases between 2000 and 2019, claiming the measure could yield $500 billion over the next decade.  

We’ve seen this movie before. Early in his term, President Obama proposed removing all tax breaks for oil and gas exploration companies, and in 2017 he pushed for a $10-per-barrel tax on oil production, banned new coal leasing on federal lands, and imposed a virtual moratorium on offshore drilling. Even former President Trump considered hiking taxes on oil and gas to help pay for his big tax cut.

The Biden plan has three specific targets: deductions for intangible drilling costs, percentage depletion, and the foreign tax credit. Some in the administration want to limit similar deductions for hardrock-mining companies. But reducing or eliminating tax preferences for oil, natural gas and minerals would be a serious mistake. This is especially the case for hardrock minerals, given that imports of minerals and metals critical for transitioning to clean energy technologies have doubled over the past 20 years.

Since 1913, oil and gas companies have been able to expense intangible drilling costs, which are much like the research and development deductions enjoyed by other industries. They are defined as costs necessary for the preparation of wells for production but that have no salvageable value. These include expenses for wages, fuel, supplies, repairs, survey work and ground clearing and comprise roughly 60 to 80 percent of total drilling costs. Eliminating this deduction would discourage production and innovation in the energy sector, thereby jeopardizing valuable technical advances such as reducing methane emissions from oil and gas wells. 

The percentage depletion allowance provides an effective way to account for the depreciation of the underlying value of mineral reserves and has been around for more than a century. The deduction applies not only to some oil and gas producers but also to coal, many metals and sand and gravel producers. Without percentage depletion, many “stripper” wells — those producing fewer than 15 barrels a day and accounting for 20 percent of domestic production — would be abandoned and shut in. Moving to an alternative, such as cost depletion, would mean higher expenses and confusion for royalty owners and small companies in particular.

Finally, the administration wants to eliminate the credit for foreign taxes levied on oil and gas production. Not only would such a move be discriminatory, it would weaken the competitive position of large American energy companies in the global marketplace.

It’s unfortunate and misleading that politicians refer to these tax deductions as “subsidies.” In fact, the oil, gas  and coal industries don’t receive subsidies but, rather like every other industry, they’re allowed to take tax deductions for the expenses they incur. These deductions aren’t the product of special favors. They are the kind of standard relief afforded manufacturers, mining companies and other businesses to help defray the basic costs of operations. For example, oil and gas companies can deduct their expenses for things such as equipment purchases and rig technicians’ salaries. The point of these deductions — as for any other industry or individual — is to ensure that taxes are levied only on income after expenses.

In practice, the tax preferences available to the oil and gas industry are quite modest, amounting to about $3 billion annually. What’s more, before the pandemic the industry was paying taxes at a higher effective rate than most others and was contributing more than $87 million daily to the federal Treasury. The industry also was paying billions of dollars annually in state and local sales, property, income taxes and royalties.

During the worst of the pandemic, oil and gas companies large and small incurred huge losses, laid off thousands of workers, and substantially reduced investment spending. Though profits are slowly returning as the domestic and global economies regain strength, the balance sheets of many companies remain weak. Hiking taxes on an industry in recovery mode makes little economic sense.

Let’s not forget that America is now the world’s number one oil- and natural gas-producing country, with all the economic and energy security benefits that follow. We’ve become a net energy exporter. Placing additional tax burdens on America’s energy industry — already one of the most heavily regulated and taxed industrial sectors — will not only imperil our hard-won energy independence, but it also could result in higher energy costs for businesses and households.

Bernard L. Weinstein is an emeritus professor of applied economics at the University of North Texas, former associate director of the Maguire Energy Institute at Southern Methodist University, and a fellow of Goodenough College, London.