Oil and Natural Gas Industry Tax Issues in the
FY2013 Budget Proposal
Robert Pirog
Specialist in Energy Economics
March 2, 2012
Congressional Research Service
7-5700
www.crs.gov
R42374
CRS Report for Congress
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epared for Members and Committees of Congress
Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal
Summary
The Obama Administration, in the FY2013 budget proposal, seeks to eliminate certain tax
expenditures that benefit the oil and natural gas industries. Supporters of these tax provisions see
them as comparable to those affecting other industries and supporting the production of domestic
oil and natural gas resources. Opponents of the provisions see these tax expenditures as subsidies
to a profitable industry the government can ill afford, and impediments to the development of
clean energy alternatives.
The FY2013 budget proposal outlines a set of proposals, framed as the termination of tax
preferences, that would potentially increase the taxes paid by the oil and natural gas industries,
especially those of the independent producers. These proposals include repeal of the enhanced oil
recovery and marginal well tax credits, repeal of the current expensing of intangible drilling costs
provision, repeal of the deduction for tertiary injectants, repeal of the passive loss exception for
working interests in oil and natural gas properties, elimination of the manufacturing tax deduction
for oil and natural gas companies, increasing the amortization period for certain exploration
expenses, and repeal of the percentage depletion allowance for independent oil and natural gas
producers. In addition, a variety of increased inspection fees and other charges that would
generate more revenue for the Department of the Interior (DOI) are included in the budget
proposal.
The Administration estimates that the tax changes outlined in the budget proposal would provide
$22.133 billion in revenues over the period FY2013 to FY2017, and $38.56 billion from FY2013
to FY2022. These changes, if enacted by Congress, also would reduce the tax advantage of
independent oil and natural gas companies over the major oil companies. They would also raise
the cost of exploration and production, with the possible result of higher consumer prices and
more slowly increasing domestic production.
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Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal
Contents
Background...................................................................................................................................... 1
The FY2013 Budget Proposal.......................................................................................................... 1
Repeal Enhanced Oil Recovery Credit ............................................................................................ 2
Repeal Credit for Oil and Gas from Marginal Wells ....................................................................... 3
Repeal Expensing of Intangible Drilling Costs ............................................................................... 3
Repeal Tertiary Injectants Deduction............................................................................................... 4
Repeal Passive Loss Exception for Working Interests in Oil Properties ......................................... 4
Repeal Percentage Depletion Allowance......................................................................................... 5
Repeal Manufacturing Tax Deduction (§199) ................................................................................. 5
Increase Geological and Geophysical Amortization Period ............................................................ 6
Other Tax Policies............................................................................................................................ 7
Last In, First Out (LIFO) ........................................................................................................... 7
Oil Spill Liability Trust Fund .................................................................................................... 8
Superfund .................................................................................................................................. 8
Dual Capacity Rule and Foreign Tax Credits ............................................................................ 8
Department of the Interior Budget................................................................................................... 9
Conclusion ....................................................................................................................................... 9
Tables
Table 1. FY2013 Oil/Gas Industry Tax Proposal Revenue Estimates.............................................. 2
Contacts
Author Contact Information............................................................................................................. 9
Congressional Research Service
Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal
Background
The Obama Administration, in the FY2013 budget proposal, has proposed eliminating a variety of
federal tax deductions and credits available to the oil and natural gas industries. This year’s
proposals are similar to those sent to Congress in conjunction with the FY2010 through FY2012
budget requests. New revenue estimates for the FY2013 proposed tax changes are $38.561 billion
over the next decade, contrasted with decade estimates of $43.6 billion in 2012, $36 billion in
2011, and $31 billion in 2010, for essentially the same proposed changes. Although these
proposals have failed to be implemented by Congress in previous years, the current atmosphere of
high federal deficits, record earnings by the major oil companies, and an increasing price of
gasoline might reduce resistance to increasing taxes on the industry.
The Administration characterizes the deductions and credits slated for elimination as tax
preferences, or oil and gas subsidies, that are costly to U.S. taxpayers and do little to either
provide incentives for increased production or reduce prices to consumers.1 A contrasting
description is provided by the American Petroleum Institute (API), which describes the tax
provisions slated for elimination as “standard business deductions (some available to all other
industries) and mechanisms of cost recovery—a fundamental and necessary component to a
national income tax system.”2
The Administration also characterizes repealing these tax preferences as eliminating market
distortions, and links them to providing resources for investments in clean, renewable, efficient
energy resources.
The FY2013 Budget Proposal
The Administration’s proposals to foster a clean energy economy and reduce consumption of
fossil fuels have led to eight proposed tax changes for the oil and natural gas industries. Table 1
identifies the proposed tax changes and the Administration’s estimates of the revenue gains for
2013, the five year period FY2013-FY2017, and the 10-year period FY2013-FY2022.
Many of these proposed tax changes have the effect of equalizing the tax treatment of
independent oil producers to that of the major oil companies. Equalization is accomplished by
eliminating preferential tax treatment of the independent companies not available to the major oil
companies.3 In some cases, for example, the expensing of intangible drilling expenses, the major
oil companies have been excluded from the benefits of the tax provision for years, while the
independent companies continue to receive the benefit.
1 FY2013 federal budget request, Department of Energy, Cuts, Consolidations, and Savings, p. 80.
2 American Petroleum Institute, “FY2013 Budget Calls for Targeted Tax Increases on America’s Oil & Natural Gas
Producers,” February 2012, http://www.api.org.
3 Independent companies are generally defined to mean non-integrated companies. They might, for example, work in
exploration and production, but not in refining or marketing.
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Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal
Table 1. FY2013 Oil/Gas Industry Tax Proposal Revenue Estimates
(in millions of dollars)
Proposed Change
2013
2013-2017
2013-2022
Repeal Enhance Oil Recovery Credit
0
0
0
Repeal Credits for Oil and Gas from Marginal Wells
0
0
0
Repeal Expensing of Intangible Dril ing Costs
3,490
10,968
13,902
Repeal Deduction for Tertiary Injectants
7
51
100
Repeal Passive Loss Exception for Working Interests
9 47 82
in Oil and Natural Gas Properties
Repeal Percentage Depletion for Oil and
612 5,029 11,465
Natural Gas Wells
Repeal the Domestic Manufacturing Deduction for
574 4,877 11,612
Oil and Natural Gas Companies
Increase Geological and Geophysical Amortization
61 1,161 1,400
Periods
Totals 4,753
22,133
38,561
Source: FY2013 federal budget request, Department of Energy, Cuts, Consolidations, and Savings, p. 80.
Notes: Revenues represent changes from current law. A zero entry in Table 1 implies no revenue effect under
current and forecasted conditions in oil and natural gas markets. Order of proposals is as per the budget
proposal.
As shown in Table 1, the proposed tax changes would have the effect of raising an estimated $4.8
billion in FY2013. Almost all (96%) of the revenues from the proposed tax preference repeal
from FY2013-FY2022 would come from only three of the proposals, while two of the proposals
would provide no revenue at all.
Compared to the FY2012 budget proposal, the current proposal provides more revenue in the
current year, $4.8 billion compared to $3.5 billion, but lower revenues over the 10-year period,
$38.6 billion compared to $43.6 billion. The major difference in the revenue estimates comes
from a revision of the gains from repealing the domestic manufacturing deduction. That provision
was expected to yield $18.3 billion over the 10-year time horizon in 2012, compared to only
$11.6 billion in the current estimate.
Repeal Enhanced Oil Recovery Credit
The enhanced oil recovery credit provides for a credit of 15% of allowable costs associated with
the use of oil recovery technologies, including the injection of carbon dioxide, to supplement
natural well pressure, that can enhance the production from older wells. The credit is only
available during periods of low oil prices, determined by yearly guidance with respect to what
constitutes a low price. The credit has not been in effect over the past several years. Elimination
of this credit would likely not have any effect on current, or expected, oil production, as oil prices
are generally expected to remain high. Periods of low oil prices are usually associated with excess
supply in the market. During periods of excess supply, it is unlikely that keeping older, higher-
cost, low-production wells producing is an effective strategy for oil companies. Revenues from
these wells are unlikely to cover operating costs in periods of low prices, although the credit
could provide the margin that keeps these wells in production.
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Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal
Repeal Credit for Oil and Gas from Marginal Wells4
The marginal well tax credit was implemented as the result of a recommendation by the National
Petroleum Council in 1994.5 The purpose was to keep low-production oil and natural gas wells in
production during periods of low prices for those fuels. The tax credit is designed to maximize
U.S. production levels even when energy markets result in low world prices for oil, and low
regional prices for natural gas. It is believed that up to 20% of U.S. oil production and 12% of
natural gas production might be sourced from wells of this category. The credit was enacted in
2004, but has not been utilized because market prices have been high enough since that time to
justify production on economic grounds without the application of the credit. The credit is not
likely to be an important factor if prices remain high, or if the United States is successful in
transitioning to alternative energy sources. The high-cost wells that fall into the marginal well
category are likely to be some of the first eliminated on economic efficiency grounds if a
reduction in petroleum prices occurs even if the credit were maintained.
Repeal Expensing of Intangible Drilling Costs
The expensing of intangible drilling costs has been part of the federal tax code since 1913.
Intangible drilling costs generally include cost items that have no salvage value, but are necessary
for the drilling of an exploratory well, or the development of a well for production. Intangible
drilling costs cover a wide range of activities and physical supplies, including ground clearing,
draining, surveying, wages, repairs, supplies, drilling mud, chemicals, and cement required to
commence drilling, or to prepare for development of a well. The purpose of allowing current-year
expensing of these costs is to attract capital to what has historically been a highly risky
investment. Current expensing allows for a quicker return of invested funds through reduced tax
payments.
In recent years, the risk associated with finding oil has been reduced, but not eliminated, through
the use of advanced technology, including three-dimensional seismic analysis and advanced
horizontal drilling techniques, among others. These advances make expensive “dry holes” less
likely, and expand the physical range of exploration and production activities available from a
drilling rig, reducing the cost of exploration of prospective oil and natural gas fields.6
In the current law, the full expensing of intangible drilling costs is available to independent oil
producers. Since 1986, major integrated oil companies have been able to expense 70% of their
intangible drilling costs and capitalize the remaining 30% over a 60-month period. The FY2013
budget proposal would repeal both direct expensing and the capitalization requirement, and
substitute generally applicable accounting procedures for cost recovery.
4 Marginal wells produce on average less than 15 barrels per day, produce heavy oil, or produce up to 25 barrels per
day, but with 95% or more water content.
5 The credit is $3 per barrel (inflation adjusted), and/or $0.50 per thousand cubic feet of natural gas (inflation adjusted)
from a marginal well. The credit phases out once threshold prices are reached.
6 According to Energy Information Administration data, in 1961 there were 44,254 oil and natural gas exploration and
development wells drilled in the United States, of which 17,331 were dry (39%). In 2011, 45,529 oil and natural gas
exploration and development wells were drilled in the United States, of which 4,761 were dry (10%). Data available at
http://www.eia.gov. Part of the reduced cost of dry holes is offset by the cost of using new technologies.
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Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal
Administration estimates are that the repeal of the expensing of intangible drilling costs provision
will yield $13.9 billion in revenue over the decade to 2022. In response to a similar tax proposal
in the FY2010 federal budget proposal, the Independent Petroleum Association of America
(IPAA) estimated that the tax change would result in an initial year reduction in investment in
U.S. oil development of about $3 billion.7 IPAA’s estimated reduction in oil development
spending implied an almost dollar-for-dollar relationship between higher taxes and reduced
investment. Little empirical evidence for the estimate was provided. The effect of the elimination
of the expensing of intangible drilling costs in FY2012 was estimated by IPAA to result in an
almost immediate one-third reduction in drilling budgets.8
Actual reductions in drilling budgets are likely to be determined by the effect of increased taxes
in conjunction with the price of oil. If the price of oil were to settle in the $40-per-barrel range
that prevailed in December 2008, the burden of additional tax expense on the independent firms
could reduce drilling activity. The combination of low oil prices and additional taxes might not
justify the development of relatively high-cost resources, especially in deep waters, as in the Gulf
of Mexico. However, with the February 2012 price of oil above $100 per barrel, supported by
political unrest in the Middle East and other factors, the additional tax expense is likely to have a
smaller effect on reducing oil development activity.9
Repeal Tertiary Injectants Deduction
Tertiary injection expenses, including the injectant cost, can be fully deducted in the current tax
year. Supporters of the favorable current treatment of these expenses point to the importance of
tertiary recovery methods in maintaining the output of older wells, as well as the environmental
advantages of injecting carbon dioxide, a primary tertiary injectant, into wells. Repeal of the
deduction, or less favorable tax treatment of the expenses, would be likely to reduce oil output
from older producing fields during periods when the profit margin, and the price of oil, is low.
During a period of high oil prices, the repeal is likely to have a smaller effect on production
levels.
Repeal Passive Loss Exception for Working Interests
in Oil Properties
Repeal of the passive loss exception for working interests in oil and natural gas properties is a
relatively small item in terms of tax revenues, estimated at $82 million from FY2013 to FY2022.
The provision exempts working interests, investments, in gas and oil exploration and
development from being categorized as “passive income (or loss)” with respect to the Tax Reform
Act of 1986. This categorization permits the deduction of losses in oil and gas projects against
other active income earned without limitation, and is believed to act as an incentive to induce
investors to finance oil and gas projects.
7 Independent Petroleum Association of America, “New Natural Gas and Oil Taxes Would Crush America’s Clean
Energy and Energy Security,” http://www.ipaa.org/news/docs/ObamasNewtaxes2009.pdf.
8 Independent Petroleum Association of America, “Increasing Taxes on America’s Independent Natural Gas and Oil
Producers—A Bad Idea,” http://www.ipaa.org.
9 On February 22, 2012, the observed price of West Texas Intermediate on the NYMEX was $106.17 per barrel.
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Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal
Repeal Percentage Depletion Allowance
Percentage depletion is the practice of deducting from an oil company’s gross income a
percentage value, in the current law 15%, which represents, for accounting and tax purposes, the
total value of the oil deposit that was extracted in the tax year. Percentage depletion has a long
history in the tax treatment of the oil industry, dating back to 1926. The purpose of the percentage
depletion allowance is to provide an analog to normal business depreciation of assets for the oil
industry, in effect equating the tax treatment of oil deposits to the tax treatment of capital
equipment in more traditional manufacturing industries. The analogy is based on the observation
that both capital equipment in traditional manufacturing, as well as an oil deposit, are “wasting
resources” in the sense that they both require capital investment to generate an income stream,
and that both will eventually become nonproductive through obsolescence or through wearing
out. Depreciation allowances are applied against the investment in capital equipment, and
depletion allowances are applied to the value of oil deposits as a way to recover initial
investments.
In its current form, the allowance is limited to domestic U.S. production by independent
producers, on the first 1,000 barrels per day, per well, of production, and is limited to 65% of the
producer’s net income.
Percentage depletion was eliminated for the major oil companies in 1975. Although major oil
companies’ profits were likely affected by the tax change, their production of oil showed little
variation as a result. Production of oil within the United States remains attractive for companies
because ownership of the oil is allowed in this country. In most areas of the world, ownership of
oil is vested in the national oil company, as a proxy for the state itself. The result is generally a
lower share of revenues for private oil companies producing outside the United States. The
Administration projects that the repeal of the percentage depletion allowance would yield tax
revenues of approximately $11.5 billion over the period FY2013 through FY2022.
Repeal Manufacturing Tax Deduction (§199)
A provision in the proposed budget for FY2013 that affects both independent and the major
companies’ oil and natural gas tax liabilities is the repeal of the domestic manufacturing tax
deduction.10 As shown in Table 1, the Administration estimates that the repeal of this deduction
for the oil and natural gas industries would contribute $4.88 billion in revenue for the period
FY2013 to FY2017. The total increase in tax revenue is estimated to be $11.61 billion from
FY2013 to FY2022, according to data reported in the budget proposal.
This tax provision was enacted in 2004 as part of the American Jobs Creation Act to encourage
the expansion of American employment in manufacturing. The oil industry was categorized as a
manufacturing industry, and hence, eligible for the deduction, which was to be phased in over
several years, beginning at 3% in 2005, and rising to a maximum of 9% in 2010. The base of the
tax is net income from domestic manufacturing activities, capped by a limitation related to the
10 The FY2013 budget proposal also requests repeal of the deduction for coal and other hard minerals in addition to
fossil fuels. This proposal is revenue-neutral because revenues gained by the repeal of the deduction for these industries
would be used to finance an increase in the deduction rate for domestic manufacturing firms.
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size of the company’s payroll. Section 199(d)(9) of the Tax Code limits the rate available to the
oil and natural gas industries to 6%.
This tax deduction was intended to provide domestic firms an incentive to increase domestic
employment in manufacturing at a time when there was concern that manufacturing jobs were
migrating overseas. By allowing a percent deduction of net income, up to the payroll limitation,
the effective cost of labor to the manufacturer was reduced. The reduction in net labor cost was
intended to expand employment, increase output, and reduce prices, making domestically
manufactured goods more competitive in the U.S. and world markets.
Although the oil and natural gas industries are classified as manufacturing industries for data
reporting and tax purposes, they differ from traditional factory manufacturing in a number of
ways. For example, the production of petroleum products at a refinery is only indirectly related to
the level of employment.11 This implies that if wage costs go down due to the tax deduction, there
is less chance that the result will be increased output due to higher employment. Even if
employment did increase, it would have little effect on national employment levels due to the
capital-intensive nature of the industry. The Bureau of Labor Statistics reports that oil and natural
gas extraction industries employed approximately 185,500 workers in December 2011, of which
about 105,700 were classified as production workers.
The period since 2004, while difficult for American manufacturing as a whole, has been generally
one of high profits for the oil industry. The generally high, although volatile, prices for oil
prevailing since 2004 that have generated the high profits for the industry are seen as the critical
factor in oil investment. Oil exploration tends to increase when prices are expected to increase,
and possibly remain high, and investment decreases when prices are expected to decrease and
possibly remain low for a sustained period. The variability and level of expected oil and natural
gas prices are likely to be a more important factor in determining capital investment budgets, and
hence exploration and production development budgets, than the repeal of a tax benefit that is
capped by a relatively low wage bill for the companies.
Increase Geological and
Geophysical Amortization Period
Geological and geophysical expenses are incurred during the process of oil and natural gas
resource development. The most favorable tax treatment of these costs would be to allow them to
be deducted in the year they are incurred. Requiring these costs to be amortized, or spread out for
tax purposes, over several years is less favorable. The longer the amortization period, the less
favorable the tax treatment, because a smaller amount is deducted each year, and more time is
required to recover the entire cost.
Currently, the major integrated oil companies amortize geological and geophysical costs over a
period of seven years. Independent producers amortize these costs over a period of two years.
Under the FY2013 budget proposal, independent producers would have their amortization period
extended to seven years, equalizing treatment with the integrated oil companies. The extended
amortization period for independent producers is projected by the Administration to yield
11 The refinery can attain different utilization rates and product mixes with no, or minor, variations in labor utilization.
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$1.4 billion over the period FY2013 to FY2022. IPAA estimated in 2010 that a similar proposal in
the FY2011 budget proposal would likely reduce exploration and development activities on a
dollar-for-dollar basis as a result of altering this tax provision. However, it seems unlikely that oil
producers would reduce exploration investment to this extent if the spread of the market price
over the full cost of oil exploration and development remains high, as it generally has been in the
period of high oil prices since 2004. Additionally, if prices decline to a level near the cost of
exploration and development, investment is likely to be curtailed even with the more favorable
tax treatment of geological and geophysical expenses currently in place. If the industry were
experiencing a time of stagnant oil prices that were near the cost of production, relatively small
changes in tax expenditures might affect investment and production activities. However, in a time
of high and volatile oil prices, small changes in tax expenses are likely to be overshadowed by
price changes derived from other factors.
Other Tax Policies
API, in responding to President Obama’s FY2013 budget proposal, identifies a number of other
proposed tax changes that would affect the oil industry. These changes include the repeal of the
last-in-first-out (LIFO) accounting method, increasing the Oil Spill Liability Trust Fund taxes,
reinstating Superfund taxes, and modifying the Dual Capacity Rule.
Last In, First Out (LIFO)
LIFO, as described by API, is not a tax loophole, but a well-established accounting methodology
to determine taxable earnings.12 Under LIFO accounting procedures, firms assume that the last
unit of a good that the company acquires in its inventory is the first unit of the good that is sold.
In periods of price inflation, or periods when the expected cost of acquiring inventories is rising,
LIFO is beneficial in reducing taxes by allowing the cost deduction of the most recent
(expensive) goods, independently of which goods were actually sold out of inventory.
The general upward movement of oil prices since 2004 has been, with the significant exception of
the period when the effects of the recession drove oil prices down (September 2008 to January
2009), a favorable period for the oil industry to be using LIFO. To the extent that demand
conditions and political unrest in oil exporting regions might keep the price of oil rising, keeping
LIFO in place would be a tax advantage for the oil industry. API states that, if it were repealed,
companies might have to redirect cash or sell assets to cover the tax payment, destroying some
businesses. Changing the LIFO provision could raise $78.3 billion over the period FY2013 to
FY2022, with $25.8 billion coming from the oil and natural gas industries.13
12 American Petroleum Institute, “FY2013 Budget Calls for Targeted Tax Increases on America’s Oil & Natural Gas
Producers,” February 2012, http://www.api.org.
13 Ibid.
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Oil Spill Liability Trust Fund
The FY2013 budget proposal includes a proposed increase in the Oil Spill Liability Trust Fund
financing, by raising the tax on imported and domestic oil to 9 cents per barrel in 2013 and to
10 cents per barrel in 2017. The current tax is 8 cents per barrel, to rise to 9 cents per barrel in
2016. These proposed tax increases to finance the fund at a higher rate were likely motivated as a
response to the Deepwater Horizon oil spill in the Gulf of Mexico.14
Superfund
The Superfund finances cleanup of the nation’s high risk contaminated sites for which the
responsible parties cannot be found, or cannot pay. Superfund taxing authority expired at the end
of 1995. The FY2013 budget proposal would reinstate an excise tax of 9.7 cents per barrel on
domestic and imported crude oil, including crude oil sourced from bituminous deposits and
kerogen-rich rock.15 In addition, to the oil excise tax, other dedicated taxes on chemicals and
corporate income have been proposed.16 The Administration and supporters of reauthorization
believe that reinstatement of Superfund taxes would reduce the reliance on general Treasury
revenues. The API contends that the excise taxes would impose a disproportionate share of the
total cleanup costs on oil production and the sale of petroleum products. The API also questions
whether a shift away from the use of general Treasury revenues as a source of funding would
speed up cleanup efforts, if the overall appropriations from the trust fund were to remain constant
and only the funding sources changed.17 The FY2013 budget proposes a cut in the Hazardous
Substance Superfund resourcing level of about 3%.
Dual Capacity Rule and Foreign Tax Credits
The credit for foreign income taxes paid, upon which the Dual Capacity Rule is based, dates back
to 1918. Since that time corporations have been able to credit, directly from their U.S. income tax
liabilities, income tax payments made to foreign governments. The period from the end of World
War II to 1950 saw a new interpretation of this tax rule develop with respect to the oil industry.
Before that time, oil-producing countries like Saudi Arabia charged the oil companies operating
in their countries royalties, based on the resources extracted, as well as other taxes. For U.S. tax
purposes, the royalties were treated as costs of doing business, hence, an expense, but not a direct
credit against U.S. tax liabilities. In 1950, Saudi Arabia and the U.S. major oil companies
operating there began negotiations to transform royalty payments into income taxes. This change
had the effect of allowing the companies to pay more to Saudi Arabia, increase their after-tax
earnings, at the expense of essentially transferring funds from the U.S. Treasury to the Saudi
government.18
14 See National Pollution Trust Fund Center, U.S. Coast Guard, for details on the Oil Spill Liability Trust Fund.
Available at http://www.uscg.mil/npfc/About_NPFC/osltf.asp.
15 For a discussion of issues regarding reauthorization of Superfund taxes, see the section on the “Harzardous Substance
Superfund Trust Fund” in CRS Report R41039, Comprehensive Environmental Response, Compensation, and Liability
Act: A Summary of Superfund Cleanup Authorities and Related Provisions of the Act, by David M. Bearden.
16 In the 112th Congress, see H.R. 1596, H.R. 1634, H.R. 3638 (Subtitle G of Title II), and S. 461.
17 American Petroleum Institute, “FY2013 Calls for Targeted Tax Increases on America’s Oil and Natural Gas
Producers,” February 2012, available at http://www.api.org.
18 Daniel Yergin, The Prize, Simon & Schuster, New York, 1991, p. 446.
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Proposed modification of the dual capacity rules would restrict companies from claiming the full
amount of foreign income taxes as a credit against U.S. taxes. Instead, the oil companies would
only be allowed to credit amounts equal to the general corporate tax rate applicable to other
industries. Any additional tax payments would be classified as tax-deductible operating expenses.
The effect of the change in dual capacity rules would be to reduce after-tax revenues for the
companies, as well as returns from overseas investments. This could lead to U.S. firms choosing
to invest in fewer marginal overseas projects.
Department of the Interior Budget
The Department of the Interior (DOI) budget proposal contains several changes in fees and other
revenue-generating items that would affect the oil and natural gas industries.
The FY2013 budget proposal includes provisions to transfer the cost of drilling inspection and
permit fees to the companies in the form of increased fees. Additionally, fees would be
established for new nonproducing oil and gas leases to encourage development and production.
Royalty rate adjustment and terminating the royalty-in-kind program are also included in the
budget proposal.
Although these fees and charges would increase the cost of exploring, developing, and operating
oil and natural gas facilities under DOI’s management, and are likely to reduce those activities as
suggested by opponents of the proposals, the effects are likely to be small, as these fees represent
only a fraction of the revenues, profits, or other taxes and fees paid to the government. Supporters
of these fees might make the argument that they represent “user charges” consistent with
environmentally sound management of resources on federal lands.
Conclusion
On the one hand, the tax changes proposed in Table 1 would increase tax collections from the oil
and natural gas industries and may have the effect of decreasing exploration, development, and
production, while increasing consumer prices and possibly increasing the nation’s dependence on
foreign oil. These same proposals, from an alternate point of view, might be considered to be the
elimination of tax preferences that have favored the oil and natural gas industries over other
energy sources and made oil and natural gas products artificially inexpensive, with consumer cost
held below the true cost of consumption when external costs associated with environmental costs
and energy dependence, among others, are included.
Author Contact Information
Robert Pirog
Specialist in Energy Economics
rpirog@crs.loc.gov, 7-6847
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