Senate plan takes aim at oil industry tax breaks

WASHINGTON — Senate Finance Committee Chairman Max Baucus on Thursday unveiled a proposal to spike a raft of oil industry tax breaks as part of a broader plan to lower the corporate tax rate.

The discussion draft released Thursday would limit companies’ use of accelerated depreciation to write off capital expenditures immediately — a change that would cut across many industries.

But some of the biggest effects would be borne by the oil and gas industry, which would be barred from immediately writing off intangible drilling costs, such as repairs, site preparation and hauling supplies. Baucus’ plan also would bar taxpayers from claiming a percentage depletion for oil and natural gas wells.

The industry also would be forced to abandon the “last in first out” accounting technique that allows inventories to be valued at the most recent price paid when calculating net profit and taxable revenue. Companies that use the LIFO accounting trick — instead of a more international accepted “first in, first out” method — can slash their taxable revenue if the prices for their reserves have gone up. The provision is popular with oil companies, who have benefited from using LIFO to value reserves of crude that have generally climbed in price over the past decade.

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Baucus’ proposal does not target the full range of oil and gas industry tax incentives that have been in the Obama administration’s crosshairs. But it still drew criticism from oil industry leaders, who called it short-sighted.

Barry Russell, president of the Independent Petroleum Association of America, said the current tax code encourages critical investment in new energy production, but Baucus’ plan could jeopardize that:

Congress should know that the tax policies that govern independent producers are not credits, subsidies or handouts. These provisions and deductions, which are available to nearly every American industry, enable continued investment in U.S. energy exploration and production. Independent energy producers — companies with an average of 12 employees, which drill nearly 95 percent of the nation’s oil and gas wells — are at the heart of America’s great energy revival. The current provisions in the tax code that promote continued American energy production are key to the success of these small operators.

The American Petroleum Institute said it was reviewing the proposal, but spokesman Brian Straessle noted the importance of cost-recovery measures to reinvestment.

“Changes to cost recovery and repeal of legitimate accounting methods like LIFO could unintentionally hit the brakes on America’s energy and manufacturing renaissance,” Straessle said. “People’s jobs are at stake, so lawmakers had better get the details of tax reform right.”

The American Exploration and Production Council also weighed in, saying it “is not good policy” to boost taxes “on an industry that is providing abundant, affordable domestic energy supplies, helping to spur economic growth and moving our nation toward energy independence.”

“Independent oil and natural gas exploration and production companies should be allowed to continue to deduct their ordinary and necessary business expenses,” said council president Bruce Thompson. “To limit the ability of these companies to deduct these expenses as they are incurred in the search for and production of oil and natural gas amounts to a job and growth killing tax increase.”

The industry representatives cite a recent study by Wood Mackenzie that said if oil and gas companies were barred from immediately deducting drilling costs, it could cause a loss of 190,000 jobs and reduce industry spending by $407 billion over the next 10 years.

The oil industry has been able to preserve its cherished tax breaks for years, despite pushes by some congressional Democrats and the Obama administration to repeal incentives that date back decades.

But now, the tide may be turning, as lawmakers from both parties are writing tax reform bills that would lower the corporate tax rate in exchange for repealing “loopholes” and deductions. Both Republicans and Democrats say they are willing to take aim at sacred cows — provisions that may have been used for generations and remained on the books during other tax code overhauls.

While industry backers insist their provisions have allegories in other parts of the tax code, critics say the tax breaks have long outlived their usefulness.

In releasing his latest draft, Baucus signaled his interest in modernizing the nation’s tax code and doing away with legacy deductions.

“America today is using a bloated tax code that was built for businesses close to 30 years ago,” he said. “The code is completely outdated and acting as a brake on economic growth. More must be done to simplify tax rules, lessen the burden on small businesses and jumpstart job growth.”