• Energy Tax Facts
  • 12 Jul 13

Study: Repealing IDC Deduction Would Destroy U.S. Jobs

Today, the American Petroleum Institute (API) released a study, conducted by Wood Mackenzie, that found repealing the Intangible Drilling Costs (IDCs) tax deduction would have a profoundly negative impact on American energy production, including the men and women whose jobs depend on it.

According to the study, repeal of the IDC deduction would cost 190,000 American jobs in 2014 and 233,000 jobs by 2019.  Due to the increased cost this repeal would impose on an already capital-intensive industry, producers would also be forced to cut back their production by 15 to 20 percent annually, reducing U.S. energy industry spending by $407 billion between 2014 and 2023. This cut back would lead to a production reduction of 3.8 million barrel of oil equivalent per day – a huge loss for the economy and the energy security that increased production provides.

On the other hand, keeping in place this historic tax deduction – the same deduction provided a wide array of businesses – will allow domestic energy production to continue to soar:

“If the current US policy regarding IDCs is left in place, Wood Mackenzie predicts that US domestic production will grow from 22.4 mmb/day in 2013 to 26.8 mmb/day in 2023, representing a 20% increase over this 10 year period. We expect to see significant production growth from the Rockies, Northeast, Gulf Coast and Gulf of Mexico regions. This production growth is being driven by the drilling of new wells on a number of fronts including the unconventional oil plays, consolidation in the shale gas plays and new activity in the frontiers.” (p.12)

Oil and natural gas production from shale, driven chiefly by independent producers, is at its highest level since 1992, with every new well pad bringing jobs, prosperity, and opportunity to many near-forgotten towns. Repealing the IDC deduction would jeopardize this future and put the more than 7,000 independent producers who drill these wells at risk of higher costs and less output. That’s a tough sell to hard working Americans like David Hill or Jerry James, Ohioan independents with just 25 employees, or the small businesses who have seen new life come into their communities alongside this development.

Let’s also look at North Dakota, where development of the Bakken Shale is a big reason why the state enjoys the lowest unemployment rate in the country. If the IDC deduction is repealed, 18,726 people will lose their jobs, and 514 wells will be lost in 2014 alone.

While the Administration justifies such a tax increase with the belief it will bring money into the federal treasury, in reality this change will actually hurt the American economy and reduce public revenues.  From the study:

“Short run federal tax increases would be more than offset by reductions in federal, state, and private royalties and other state taxes lost. After 2020, the tax take would be drastically reduced due to lowered production and revenues.” (p.38)

According to the Energy Information Administration (EIA), hydraulic fracturing has helped catapult U.S. oil production to its highest level in two decades. Unemployment rates in towns with shale development are some of the lowest in the nation. And as OPEC admits, American energy is redefining the global energy market, placing the international cartel’s power into question. Altering the IDC deduction, a fundamental part of the U.S. tax code, will threaten domestic energy output, while costing American jobs and taking away from the U.S. treasury. This is simply not what our ailing economy needs.