President Obama’s Proposals

President Obama’s proposed budget cuts don’t remove all subsidies for fossil fuels, which is a good thing- important programs like the Low Income Home Energy Assistance Program (which subsidizes heating oil for low income families) or the Black Lung Disability Trust Fund (which covers disability costs for miners with lung diseases) are classified as fossil fuel subsidies[1].

However, there are many subsidies and tax preferences given to fossil fuel corporations which go against the public interest by exacerbating climate change. Cutting these would help preserve American security and prosperity

Overview:

$29.1 billion in savings come from eliminating tax breaks which favor the fossil fuel industry over other industries. (“tax preferences”)

$12.3 billion in savings comes from the Royalty Tax provision for coal and by repealing the Domestic Manufacturing Tax Deduction for fossil fuel corporations.

$113 million in savings comes from cutting spending on fossil fuel research and development.

Breakdown:

The titles of the sections and provisions below and the amount of savings come from a report produced by the Office of Management and Budget about the Administration’s 2013 budget proposals, “Fiscal Year 2013: Cuts, Consolidations, and Savings.”

Oil and Gas Company Tax Preferences[1]

$38.6 billion over 10 years, $4.75 billion in 2013

1. Repeal Expensing of Intangible Drilling Costs

$3.49 billion in 2013, $13.9 in 10 years

Under this provision, fossil fuel companies can deduct certain types of drilling expenditures from their taxes (ie, wages fuel, repairs, supplies related to mining). Other industries that incur similar expenses do not receive this deduction—because such expenses provide future benefit to the company, they are absorbed into the cost of doing business.[2]

2. Repeal Domestic Manufacturing Tax Deduction for Oil and Natural Gas Companies: $574 million in 2013, $11.61 billion in 10 years

Companies which manufacture, produce, or extract in the United States receive a subsidy, and non-fossil fuel companies would continue to receive it under this provision.

3. Repeal Percentage Depletion for Oil/Natural Gas Wells:

$612 million in 2013, $11.47 billion in 10 years.

In other extractive industries, companies are allowed to deduct an amount that represents the decline in their investments value that year (“cost depletion”). However, independent oil and gas wells can calculate their deductions based on their revenue (“percentage depletion”), which allows significantly greater deductions.[3]

4. Increase Geological and Geophysical Amortization Period for Independent Producers to 7 Years

$61 million 2013, $1.4 billion in 10 years

Amortization is a systematic payment plan to recover costs invested for certain expenditures.[4] Independent companies can amortize costs over 2 years, but this provision would increase that period to 7 years to match the amortization period of integrated companies.[5]

5. Repeal Deduction for Tertiary Injectants

$7 million in 2013, $100 million in 10 yrs

Tertiary methods increase the amount of oil extracted from a well. This deduction lowers the costs of the fluids, gases, and other chemicals involved in the process. In other industries, such costs of business must be recovered over time rather than deducted at taxpayer expense[6].

6. Repeal Exception to Passive Loss Limitations for Working Interests in Oil and Natural Gas Properties

$9 million in 2013, $82 million in 20 yrs

Unlike other energy industries, there is a limit on the amount of deductions allowed for investor losses from “passive activities” (ie, renting land). Oil and gas companies have no limit on the their passive loss deductions, giving them an advantage over other companies.[7]

7. Repeal Enhanced Oil Recovery Credit

This is a 15% income tax credit for recovering domestic oil when using certain unconventional methods to extract oil, but is phased out when oil prices rise above a certain limit. Oil prices are currently too high for this credit and are expected to remain too high.[8]

8. Repeal Credit for Oil/Gas Produced from Marginal Wells

This is a tax credit based on quantities of natural gas and oil produced from low-production wells. Oil and gas prices are currently too high for this credit, and are expected to remain too high.[9]

President Obama’s justification for these policies is that they help “eliminate market distortions, strengthening incentives for investments in clean, renewable, and more energy efficient technologies.” The removal of these market distortions would “likely [have] positive impacts on national output and GDP.”

Coal Tax Preferences[10]

$2.9 billion over 10 years, $235 million in 2013

1. Percent Depletion for Hard Mineral Fossil Fuels

$1.74 billion over 10 years

See #3 under “Oil and Gas Company Tax Preferences; coal producers can deduct about 10% of their revenue rather than 15%.[11]

2. Expensing of Exploration and Development Costs

$440 million over 10 years

Coal exploration and development costs can be deducted. Under normal income tax rules, these costs would be recovered by the company extracting and selling the resources.[12]

3. Royalty Taxation

$422 million over 10 years

4. Domestic Manufacturing Deduction for Hard Mineral Fossil Fuels

$271 million over 10 years

See #2 under “Oil and Gas Company Tax Preferences”.

Fossil Energy Research & Development[13]:

$113 million in 2013

1. Carbon Capture and Storage Research and Development: $156 million in 2013

2. Advanced Fossil Energy Systems Research and Development: $55 million in 2013

3. Other Fossil Energy Research and Development: $37 million in 2013

4. Oil and Gas Research and Development: $17 million in 2013

[1] “Fiscal Year 2013: Cuts, Consolidations, and Savings.” Office of Management and Budget. page 80.

[2] “Explanation of the Obama Administration’s Oil and Gas Tax Proposals.” 23 February 2011. Baker Botts L.L.P. 22 March 2012. http://www.bakerbotts.com/file_upload/2011FebTaxObamaAdminOilandGasProposalsJump.htm

[3] “Eliminate Fossil Fuel Tax Preferences: 2012 Budget.” Tax Policy Center. 11 March 2012. <http://www.taxpolicycenter.org/taxtopics/Eliminate-Fossil-Fuel-Tax-Preferences.cfm>.

[4] Getlen, Larry. “What is amortization? Wait, don’t run away…” Bankrate.com. 8 August 2002. 22 March 2011. http://www.bankrate.com/brm/news/mtg/20020808a.asp

[5] “Statement of Michael F. Mundaca Assitant Secretary (Tax Policy) Department of the Treasury Before Committee on Ways and Means April 14 1010.” U.S. Department of the Treasury. 22 March 2012. http://www.treasury.gov/press-center/press-releases/Pages/tg640.aspx

[6] “Explanation of the Obama Administration’s Oil and Gas Tax Proposals.” 23 February 2011. Baker Botts L.L.P. 22 March 2012. http://www.bakerbotts.com/file_upload/2011FebTaxObamaAdminOilandGasProposalsJump.htm

[7] “Explanation of the Obama Administration’s Oil and Gas Tax Proposals.” 23 February 2011. Baker Botts L.L.P. 22 March 2012. http://www.bakerbotts.com/file_upload/2011FebTaxObamaAdminOilandGasProposalsJump.htm

[8] “Statement of Michael F. Mundaca Assitant Secretary (Tax Policy) Department of the Treasury Before Committee on Ways and Means April 14 1010.” U.S. Department of the Treasury. 22 March 2012. http://www.treasury.gov/press-center/press-releases/Pages/tg640.aspx

[9] “Statement of Michael F. Mundaca Assitant Secretary (Tax Policy) Department of the Treasury Before Committee on Ways and Means April 14 1010.” U.S. Department of the Treasury. 22 March 2012. http://www.treasury.gov/press-center/press-releases/Pages/tg640.aspx

[10] “Fiscal Year 2013: Cuts, Consolidations, and Savings.” Office of Management and Budget. page 27.

[11] “ATR Energy Tax Hike Series: President Obama 2013 Budget Analysis.” Americans for Tax Reform. 11 March 2012. http://s3.amazonaws.com/atrfiles/files/files/2012_ATR_Energy_Tax_Series-PercentageDepletion.pdf>.

[12] Ibid.

[13] “Fiscal Year 2013: Cuts, Consolidations, and Savings.” Office of Management and Budget. page 46.