It Is Time to Phase Out 9 Unnecessary Oil and Gas Tax Breaks

A person walks past pump jacks operating at the Kern River Oil Field in Bakersfield, California, on January 16, 2015. SOURCE: AP/Jae C. Hong

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The investment tax credit, or ITC, and production tax credit, or PTC, for clean energy have played an essential role in expediting the deployment of wind, solar, and other forms of clean energy in the United States. In December 2015, the U.S. Congress voted to extend the PTC and ITC. As part of the agreement, however, Congress decided to phase out these tax credits over time. This raises an important question, one asked by Sen. Brian Schatz (D-HI) in February: If policymakers phase out tax credits for clean energy, shouldn’t they do the same for the billions of dollars in tax breaks for the oil and gas industry?

This fact sheet highlights nine tax breaks that should be phased out. They subsidize the oil and gas industry’s operations from beginning to end—from acquisition of the resource to extraction.

Deductions for the costs of drilling wells

Location in tax code: 26 U.S.C. § 263(c)

Amount saved by repealing: $13.1 billion between 2016 and 2026

As a general practice, businesses deduct business costs from their income. But for large capital projects, they do so over the lifetime of the asset or project, not during the period in which the cost was incurred. Oil and gas companies, however, can deduct intangible drilling costs—nearly all of the expenditures a company makes to prepare a well for production—upfront, which can lower their taxable income significantly. Independent oil and gas producers can deduct 100 percent of their intangible drilling costs in the first year. Integrated oil companies can deduct 70 percent of these costs in the first year and then amortize the remaining 30 percent over five years.

Domestic manufacturing deduction for oil and gas production

Location in tax code: 26 U.S.C. § 199

Amount saved by repealing: $10.9 billion between 2016 and 2026

In 2004, Congress passed the American Jobs Creation Act, which included a tax deduction designed to incentivize domestic manufacturing in the United States and keep certain industries from moving abroad. Oil and gas producers can deduct 6 percent of taxable income derived from qualified domestic production activities. This tax break is a handout to the industry as domestic oil and gas production—by definition—cannot move abroad.

Deductions for the depletion of oil and gas deposits

Location in tax code: 26 U.S.C. § 613A(c)(1)

Amount saved by repealing: $12.1 billion between 2016 and 2026

The tax code also allows certain oil and gas companies to recover costs associated with the depletion of the natural resource—the oil or gas deposit. The depletion allowance permits royalty owners and independent oil and gas producers to deduct 15 percent of the gross income from oil and gas produced from a well each year, rather than a deduction based on the actual exhaustion of the resource each year. Operators of low-producing marginal wells are permitted to deduct more than 15 percent—based on a statutory formula linked to the price of crude—and to deduct more than their net income from the property. These producers may be able to continue claiming the depletion deduction even after they have recovered the costs of acquiring and developing the property. This means that other taxpayers are effectively subsidizing their income.

Deductions for the depletion of oil shale deposits

Location in tax code: 26 U.S.C. § 613(b)(2)(B)

Amount saved by repealing: The U.S. Treasury would save $840 million between 2016 and 2026 by repealing the depletion deduction for all hard mineral fossil fuels, of which oil shale is one. The amount applying to oil shale alone is unknown.

Oil shale—located primarily in Utah and Colorado—is expensive to extract and process, is particularly harmful to the environment, and has yet to reach commercial scale in the United States. Despite these drawbacks, companies engaged in oil shale exploration and development can claim a 15 percent depletion allowance on income generated from these activities. Consequently, taxpayers are subsidizing environmentally harmful projects that are not needed, given high-levels of oil production elsewhere in the United States.

Deductions for the costs of oil shale exploration and development

Location in tax code: 26 U.S.C. § 617

Amount saved by repealing: The U.S. Treasury would save $768 million between 2016 and 2026 by repealing this tax preference for certain mining exploration expenditures, including expenditures for oil shale. The amount applying to oil shale alone is unknown.

This tax preference allows oil and gas companies to deduct the costs of exploring and developing new domestic oil shale fields in the same tax year that the costs were incurred, rather than when those expenditures actually generate income. This means that companies engaged in oil shale production can incur costs exploring for deposits and deduct those costs from other income, whether or not they ever generate income on the property. This transfers the risk from the company to the taxpayer.

Amortization of geological and geophysical expenditures

Location in tax code: 26 U.S.C. § 167(h)

Amount saved: $1.3 billion between 2016 and 2026

Oil and gas companies use geological and geophysical surveys in order to locate and assess potential mineral deposits. Rather than amortizing these expenses over the lifetime of the project, independent oil and gas producers are allowed to write off these expenses over two years, and large integrated oil and gas companies can use seven years. This lowers the companies’ taxable income.

Deductions for tertiary injectants

Location in tax code: 26 U.S.C. § 193

Amount saved by repealing: $100 million between 2016 and 2026

This tax deduction allows oil and gas companies to deduct the costs of using tertiary recovery methods, processes in which companies inject fluids and gases into older wells in order to recover additional oil. Companies can deduct the costs in the year they are incurred rather than when the expenditures generate income, thereby lowering their taxable income.

Exception to passive loss limitation for working interests in oil and natural gas properties

Location in tax code: 26 U.S.C. § 469(c)(3)

Amount saved by repealing: $310 million between 2016 and 2026

The passive loss limitation allows taxpayers to deduct losses from passive activities—business activities in which a taxpayer has an economic interest but does not materially participate—against income from those activities. If the deductions exceed the passive income, the taxpayer must carry the remaining loss over to the next tax year. This rule is intended to prevent investors from using investments as tax shelters. Certain oil and gas interests, however, are exempt from this limitation and can use passive losses to reduce taxes on other business income.

Marginal wells tax credit

Location in tax code: 26 U.S.C. § 45I

Amount saved by repealing: $0, unless oil and natural gas prices fall below a certain threshold

Marginal wells are those that produce a relatively small amount of oil and natural gas; as a result, they are among the least cost-effective wells to operate. This tax credit allows oil and gas companies to claim a tax credit for low-producing wells when the prices for oil or natural gas dip below a threshold. Since this credit’s enactment in 2004, prices have not been low enough to trigger this tax credit. Given consistently low natural gas prices in recent years, some industry observers speculate that oil and gas companies may be able to claim this credit for the first time in 2016.

Repealing these nine tax breaks would, at minimum, save the U.S. Treasury $37.7 billion over 10 years.

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This material [the article above] was created by the Center for American Progress Action Fund. It was created for the Progress Report, the daily e-mail publication of the Center for American Progress Action Fund. Click here to subscribe. ‘Like’ CAP Action on Facebook and ‘follow’ us on Twitter

We’re Not Broke — We’ve Been Robbed

Slashing government spending now is just going to make our nation poorer.

By Richard Kirsch

With the Friday the 13^th December deadline for a federal budget deal, the cries of “we’re broke,” and “we can’t afford to keep spending,” are ringing again. But we’re not broke and acting like we are is making us poorer.

One of the biggest common misunderstandings is that governments are like households, which need to tighten their spending when times are tough. Actually, governments and households work in opposite ways.

Governments can and should spend more when times are tough. Government spending makes up for lack of spending by families and businesses, and it helps get the economy moving by getting people back to work, putting money in their pockets, and contracting with businesses.

If we needed a reminder of that, the recent government shutdown gave us one. Journalists reported story after story about how business was down, as federal workers were laid off and national parks closed. The estimates are that even though the shut down only lasted 16 days, it cost the economy $24 billion.

We need government spending and investment to get the entire economy moving forward. When families are back at work with decent wages, government tax revenues will rise and spending on social supports will fall. That’s when government can reduce spending without slowing down the economy.

During the past two years we’ve reduced the deficit by half, close to 2008 levels. That may sound like it’s a good thing, but it’s really the biggest reason the economy is so lackluster for the vast majority of Americans with a near-record-high in unemployment, stagnant wages, and a smaller proportion of Americans working than any time in the past 30 years.

We’ve also cut all the wrong things: spending that puts money in people’s pockets today and investments in our economic future. We’ve cut spending on education, unemployment insurance, environmental protection, and scientific research. Our public investment, which includes annual government programs and spending on roads, bridges, transit, research, and development is actually the lowest it’s been as a share of the economy in 60 years.

What if we’d taken a different course during the recession? How about rather than cutting spending after an initial stimulus, which avoided a second great depression by saving three million jobs, the government had kept at it?

History shows that if we have continued the levels of spending normally done after recessions, we would have spent some $800 billion more than we did, and the overall economy (and not just the stock market) would be back to the same level today that it was before the recession hit.

In short, the argument that the government must live within its means to protect our children’s future is backwards. Averting deficit spending now means starving our children’s present and their future. More parents will have to struggle to get by, fewer good jobs will be created, education will suffer, and today’s college students will stumble into their careers saddled with huge debt loads.

And our infrastructure will keep crumbling and research will dwindle, making it harder for our businesses to compete in the global marketplace.

There are ways we can reduce the deficit without slowing down the economy very much, if at all. That is by looking at the other truth about the cry that “we’re broke.” In fact, we have been robbed.

When Uncle Sam gives big corporations tax breaks to move jobs overseas, we’ve been robbed. When Washington taxes billionaires at a lower rate than their secretaries, we’ve been robbed.

To get the country moving again, Congress needs to reverse direction and increase spending on vital services and investment.

That means reversing the budget cuts on domestic spending already in place and stopping any more sequestration cuts on vital services for our families. And raising taxes on the wealthy and huge corporations, which have been gaming the system at our expense.

Instead of obsessing about the “need” to cut government spending, our leaders should be figuring out how best to stimulate the economy to provide both a better today and future for our children.

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Richard Kirsch is a senior fellow at the Roosevelt Institute and the author of Fighting for Our Health: The Epic Battle to Make Health Care a Right in the United States. He’s also a senior adviser to USAction. USAction.org.  Distributed via OtherWords. OtherWords.org.  Cartoon Credit:  Attack of the Budget Slashers, an OtherWords cartoon by Khalil Bendib.

Fast Food Giants Gorge on Subsidies

Thanks to a loophole that subsidizes CEO pay, McDonald’s, Yum Brands, Wendy’s, Burger King, Domino’s, and Dunkin’ Brands trimmed $64 million from their tax bills in 2011 and 2012.

By Sarah Anderson

The fast food industry is notorious for handing out lean paychecks to their burger flippers and fat ones to their CEOs. What’s less well-known is that taxpayers are actually subsidizing fast food incomes at both the bottom — and top — of the industry.

Take, for example, Yum Brands, which operates the Taco Bell, KFC, and Pizza Hut chains. Wages for the corporation’s nearly 380,000 U.S. workers are so low that many of them have to turn to taxpayer-funded anti-poverty programs just to get by. The National Employment Law Project estimates that Yum Brands’ workers draw nearly $650 million in Medicaid and other public assistance annually.

Meanwhile, at the top end of the company’s pay ladder, CEO David Novak pocketed $94 million over the years 2011 and 2012 in stock options gains, bonuses and other so-called “performance pay.” That was a nice windfall for him, but a big burden for the rest of us taxpayers.

Under the current tax code, corporations can deduct unlimited amounts of such “performance pay” from their federal income taxes. In other words, the more corporations pay their CEO, the lower their tax burden. Novak’s $94 million payout, for example, lowered Yum’s IRS bill by $33 million. Guess who makes up the difference?

My new Institute for Policy Studies report calculates the cost to taxpayers of this “performance pay” loophole at all of the top six publicly held fast food chains — McDonald’s, Yum, Wendy’s, Burger King, Domino’s, and Dunkin’ Brands.

Combined, these firms’ CEOs pocketed more than $183 million in fully deductible “performance pay” in 2011 and 2012, lowering their companies’ IRS bills by an estimated $64 million. To put that figure in perspective, it would be enough to cover the average cost of food stamps for 40,000 American families for a year.

After Yum, McDonald’s received the second-largest government handout for their executive pay. James Skinner, as CEO in 2011 and the first half of 2012, pocketed $31 million in exercised stock options and other fully deductible “performance pay.” Incoming CEO Donald Thompson took in $10 million in performance pay in his first six months on the job. Skinner and Thompson’s combined performance pay translates into a $14 million taxpayer subsidy for McDonald’s.

What makes all this even more galling is that these fast food giants are pocketing massive taxpayer subsidies for their CEO pay while fighting to keep their workers’ wages at rock bottom. All of the big fast food corporations are members of the National Restaurant Association, which is aggressively working to block a raise in the federal minimum wage to a level that would let millions of fast food workers make ends meet without public support.

There’s an easy solution to the perverse “performance pay” loophole. A bill introduced by Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) would simply set a firm $1 million cap for executive pay deductions — with no exceptions. Corporations could still pay their CEOs whatever they choose, but at least taxpayers wouldn’t be subsidizing anything above $1 million. The Joint Committee on Taxation estimates this legislation would generate more than $50 billion over 10 years.

It makes no sense for employees of highly profitable giant corporations to have to rely on government assistance for basic needs. It makes even less sense for ordinary taxpayers to subsidize the CEOs who are benefiting most from the fast food industry’s low-road business model.

With Congress again mulling deficit-reduction strategies, it’s high time that Washington stopped letting fast food giants gorge on both of these absurd subsidies.

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Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and is the author of the new report Fast Food CEOs Rake in Taxpayer-Funded Pay. IPS-dc.org
Distributed via OtherWords (OtherWords.org)