President Obama released his Fiscal Year 2013 Federal budget this week and one of the big headlines is that he is seeking to end the tax benefits received by the oil and gas industry. This is not a new effort. President Obama and some in Congress have spoken about ending these tax breaks for the entire Obama term. As a disclosure of bias, I did work for three years for ExxonMobil doing income tax work. After getting that out there, I believe that a focus on taking away oil and gas tax benefits is anti-American and is counter-intuitive to developing energy independence and security.
First, let’s go through the main tax benefits: intangible drilling cost (IDC) and manufacturing income deduction (Sec. 199). 
- IDC – These costs are incurred by oil and gas companies when they drill for oil and gas. For example, building an ice road in Alaska to reach isolated oil or gas can be considered IDC. Mainly, the costs that are intangible meaning that there would be no way to recover the value of the cost if the asset needed to be sold. The costs can be 100% expensed by small companies, but 70% expensed by integrated oil companies and then depreciated over 5 years. In 2012, this was about $190 million of the budget.1
I’m not sure why helping lessen risks in the oil patch is a bad thing. There are special types of risks taken by oil companies and the government providing a small inducement to invest in America is a good tradeoff. The elimination of the IDC for small companies would be devastating as this allows for smaller companies to compete with the majors who have a much more robust capital position.
- Sec. 199 – The manufacturing income deduction allows a percentage of qualified domestically produced income to provide a tax deduction.1 This credit allows for 6% of the qualified income to be deducted from income taxes as long as it is domestically produced. In 2012, this was about $604 million of the budget.1
This deduction applies to everyone who produces domestically, not just oil and gas companies. President Obama’s budget says: “The tax code currently subsidizes oil and gas production through loopholes and tax expenditures that preference these industries over others.” Hmmm, I’m not sure how a tax deduction that applies to everyone who would produce lemonade or paper planes or any other good produced domestically somehow favors the oil and gas industry.
I have read that the President favors an “all of the above” energy plan but Mr. Obama has been nothing but inconsistency on energy. This is apparent in the 2013 budget. On one hand he wants to reduce America’s dependence on imported oil. This is in itself is not necessarily a good thing. We can end the dependence on foreign oil, but what do we replace it with and at what cost? We can end importing oil from states that are neither friendly nor stable and start to import more from Canada (Keystone XL pipeline) or more from Brazil. In addition, his recommendation to improve fuel efficiency is a wonderful recommendation. However, this insistence on populist attacks on oil and gas companies do not help us develop more domestically produced oil and gas. This increases the uncertainty of investments into projects that could provide both jobs and tax/royalty revenue to help with the deficit, two sorely needed outcomes.
Cutting $40 billion in the deficit by eliminating fossil energy tax breaks is not an important reform. Investing in America should be favoring all types of energy and letting the market decide. I think these attacks scores easy political points, but does nothing to address the overall structural flaws with the federal budget. Mr. Obama is not at fault for these huge deficits, both parties have put us in a world of pain. But this again points to Mr. Obama being less than advertised. Rejecting the Simpson-Bowles plan and continuing this piecemeal policy on energy shows there are no great transformations in this president. The alternatives do not inspire hope either, so it seems that either way the next ten months and the four years after that will be filled with broken promises and millennial despair.
Houston Chronicle – Texas on the Potomac blog Puneet Kollipara 2/13/2012
Senate Joint Economic Committee
Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 40
Bloomberg – Jim Snyder and Brain Wingfield “Obama Budget Would Cut $40 Billion in Fossil-Fuel Credits” – 2/13/2012
Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 6
Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 19