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Elimination of Tax Deduction Will Hurt Texas Mineral and Royalty Owners

Congress is considering whether to eliminate or limit a federal tax deduction for intangible drilling costs. Intangible drilling costs are those costs incurred to develop an oil or gas well other than the costs of the actual well. It includes costs such as surveying, clearing the land for a well pad or storage tanks, drainage modifications, fuel, and workers’ wages. Current US tax law allows oil and gas companies to deduct these operating expenses from their taxes, exactly like other businesses deduct the intangible business expenses incurred in operating their business.

Understandably, the oil and gas industry is quite concerned about the potential elimination of this deduction. Elimination of this deduction would effectively make exploration, drilling and production of oil and gas more expensive. That means that there will be less exploration, drilling and production in Texas, as well as in other states. In turn, that means that some number of Texas mineral owners who hope to lease their minerals, and who may really need the royalty income, may lose that opportunity.

A coalition of 33 national, regional and state oil and gas associations sent a letter to the leaders of two key congressional committees, the House Ways and Means Committee and the Senate Finance Committee, who are dealing with this issue. Groups who signed the letter included the American Exploration and Production Council, or AXPC, the American Petroleum Institute, the Independent Petroleum Association of America and the Western Energy Alliance, as well as ten other national and two other regional associations and 17 state organizations, including some from Texas.

Bruce Thompson, president of AXPC, told reporters that, “Restrictions on the deductibility of these ordinary and necessary expenses would discourage the massive investment that is needed from this industry to deliver the supplies of American energy to American consumers and industry and to promote America’s energy security.” He warned about the adverse effect on job creation and economic growth in the US. The letter specifically addressed investment, highlighting the key nature of the oil and gas industry to the US economy, noting that it accounts for almost 8% of US gross domestic product (GDP).

If an elimination or restriction on intangible drilling costs is passed, the letter states that companies would be forced to “significantly lower” their drilling budgets to compensate, which would mean less oil and gas production and higher oil and gas prices for US consumers. The letter also stressed that this would actually decrease the amount of revenue flowing to the federal government from the industry. It pointed to the $87 million in daily rent, royalties, lease, and tax payments that are currently paid to the federal government that would be greatly reduced to compensate for higher costs to companies without the deduction. The letter also discussed the impact to economic recovery in terms of job growth, stating that during the recession years the oil and gas industry still managed to directly create 119,511 jobs–well paid full time jobs. Oil and gas industry officials note their average wages are 93% higher than the average salaries in the private sector overall.

The letter concluded by encouraging policymakers to oppose any measure to change the current tax structure in relation to intangible drilling costs. For an industry that is growing by leaps and bounds and has proven to be such an engine for job growth and prosperity, the industry’s request to simply allow the current process to work seems entirely reasonable and sound.

The proposal to eliminate intangible drilling costs as a tax deduction smacks of the vindictive politics of the Obama administration. If the Administration was going to be fair, the tax deduction for intangible costs of all businesses should be eliminated. The fact that the oil and gas industry is singled out suggests that Obama is continuing to whip on that industry as if it were some kind of Evil Empire. This kind of approach is not only naïve, it is completely self-defeating. The far left environmentalists might be pleased, but the rest of us are going to suffer.

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