Reforming the tax code — a work in progress

Leaders of the Congressional working group charged with rewriting the tax code as it relates to energy spent two hours Tuesday huddled with industry leaders in Houston, looking for ideas to take back to Washington.

The closed-door session at the University of Houston, the only one held outside of Washington D.C., was the fourth for the House Ways & Means Energy Tax Reform Working Group. Two additional sessions will be held in Washington later this month.

Public comments may be filed on the committee website until April 15.

Working group chairman Rep. Kevin Brady, R-The Woodlands, said a consensus has yet to emerge from the sessions, mainly because the issues are so different for each sector of the industry: Exploration companies see things differently than refiners, for example, while companies that operate internationally have different tax concerns than those that work only in the United States.

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Congress has undertaken a serious push for fundamental tax reform, and the Ways & Means Committee has split into 11 working groups, each tackling a different area.

For the energy industry, a key issue has been whether a lower overall tax rate can make up for repealing billions of dollars worth of tax breaks, including the deduction for intangible drilling costs, which allows companies to deduct the cost of repairs, site preparation and similar expenses.

Brady and working group vice chairman Rep. Mike Thompson, D-Calif., said their meetings with representatives from various sectors of the industry hasn’t produced an agreement on whether a lower tax rate can balance out the loss of deductions and, if so, what that rate should be.

“Can you get the overall rate low enough?” Thompson asked in a meeting with reporters after Tuesday’s session. “I guess that depends on how low it is. I think we’re probably a ways away from settling on where the rate is.”

And Brady said that while the tax rate is important, the cost of capital “may well matter more.”

Companies that do business internationally are concerned about being taxed just on money earned in the United States, he said.

“The cost of capital really matters,” Brady said. “This is a capital intensive industry. A progressive tax code should encourage investment, and the ability to recover it in a timely basis is important.”

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Industry leaders also have stressed the need for certainty.

“Having permanence to the tax code arose in almost every session,” Brady said.

The full working group has met with industry leaders during the Washington sessions; just Brady and Thompson were present for the Houston meeting.

The congressmen said seven companies were represented. They did not identify them — the sessions have been off-the-record, with no recordings made — but said the participants represented a broad range of the industry, from exploration and refining to manufacturing, midstream interests and a company working in renewable energy.

Despite Congress’ reputation for gridlock, both men said they are optimistic that tax reform will eventually pass.

“If I wasn’t optimistic, I’d stay home and watch my grapes grow,” said Thompson, who represents California’s Napa Valley.

Brady, noting that each of the 11 working groups is headed by both a Republican and a Democrat, said the bipartisan structure is helpful.

“Tax reform is difficult,” he acknowledged. “That’s why it’s only done once every generation. But our current tax code, we can’t keep it and stay competitive.”

And he offered a final reason for hope.

“If the Astros can win their first game,” he said, “we can do tax reform.”