What could be more stimulating that a pre-Memorial Day weekend blog on taxation of the oil and gas industry?
But my friend Jan Jarrett’s blog post today on energy subsidies moved me to – forgive the pun – drill into the subject a little deeper. Here – mercifully, in brief - is what I found.
The Congressional Research Service helpfully describes the generous federal tax subsidies to oil and gas production in a straightforward way. The subsidies include:
- Intangible Drilling and Development Costs (IDC) – drillers can deduct from taxable income 100 percent of any cost incurred that has no salvage value and is necessary for the drilling of wells or the preparation of wells for production. That includes, for example, surveying, ground clearing, and draining; wages, repairs, supplies, drilling mud, chemicals, and cement; and the cost of fracking a well. Intangible expenditures of drilling are usually about 65 to 80% of the cost of a well.
- Percentage Depletion –in the tax code since 1926, percentage depletion is the practice of deducting from an oil company’s gross income a percentage value, currently 15 percent, of the total value of the oil deposit that was extracted in the tax year.
- Geological and Geophysical (G&G) Amortization – G&G costs are written off over seven years.
- Marginal Well Tax Credit – Enacted in 2004 to create a safety net for marginal wells during periods of low prices; it has not been necessary, for obvious reasons.
- Enhanced Oil Recovery (EOR) Tax Credit – a 15% credit – a direct reduction of tax liability - on costs of using oil production using technologies that increase oil production from older wells.
- Manufacturing Tax Deduction –enacted in 2004 to encourage the development of American jobs, the gas industry can write off six percent of payroll costs subject to a cap.
- Passive Loss Exception for Working Interests in Oil and Gas Properties – I won’t even attempt to describe it.
These federal tax provisions were estimated in 2009 to be worth $30 billion annually to the industry.
But wait, as the TV infomercial pitchman says, there’s more.
- Tangible Drilling Cost Tax Deduction - The costs of equipment are considered Tangible Drilling Costs and are 100 percent tax deductible.
- Lease Costs - Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and lease operating costs are also 100% tax deductible.
- Tertiary injection expenses, including the injectant cost, are also 100% tax deductible.
So much for that brief tour of Federal tax subsidies. What about state-level taxation in Pennsylvania? Natural gas drillers in Pennsylvania pay very little in state and local taxes, despite industry claims to the contrary. And 2012’s Act 13 imposed an effective tax rate of about 1.5% - one of the lowest rates in the nation - among many egregious flaws.
The industry, of course, insists that these subsidies are necessary to support investment and produce domestic energy. Why a fraction of such subsidies for renewable energy are not necessary - or downright un-American, as is frequently argued - is less clear.