• Energy Tax Facts
  • 3 Sep 13

ABQ Journal (Op-Ed): Repeal of the IDC deduction could have a major impact on New Mexico

Opponents of oil and gas development have successfully perpetrated a lie by parroting the “end subsidies to oil and gas” talking points. But the facts show the claims of “subsidies” and “giveaways” are misleading at best.

Oil companies do not receive government subsidies, which are defined as “grants or gifts of money.” Nor do they receive favorable treatment under the U.S. Tax Code. In fact, the tax code currently discriminates against large oil companies by excluding them from some tax breaks and limiting others that were created decades ago to encourage business expansion, economic growth and job creation.

Consider the “percentage depletion deduction.” It allows companies that extract energy, minerals and metals from the ground to take a deduction on their gross income to help them recover leasing costs. Companies that mine for gold, iron and other natural resources are eligible for the deduction. Big oil companies are specifically excluded.

Oil companies also are treated differently under Section 199, which provides a 9 percent deduction on earned income to all domestic manufacturers in production and extraction industries. Large oil companies are limited to a 6 percent deduction.

The large, integrated oil companies also are denied full access to the intangible drilling costs (IDC) provision, which provides an accelerated timetable for deducting some drilling expenses. Small companies that specialize in exploration and production can deduct these costs in the same year the costs are incurred. But integrated companies can deduct only 70 percent of these costs the first year and can recoup the remainder over five years.

Despite the fact that big companies are already penalized, President Obama’s proposed 2014 budget contains tax changes that would single out oil and gas producers for punishment.

If the IDC provision, which has been in the tax code since 1916, is repealed, 190,000 jobs could be destroyed and drilling in the U.S. could fall by 15 percent to 20 percent per year, according to a Wood Mackenzie study.

Repeal of the IDC could have a major impact on New Mexico, where the oil and natural gas industry contributes $11.3 billion to the economy and accounts for 14.2 percent of the state’s GDP. More than 105,000 direct, indirect or induced New Mexico jobs, many of which could be threatened, are supported by the oil and gas industry.

Plus, oil and gas industry jobs pay more than twice the state average – $86,130 per year on average as contrasted with an average of $39,525 per year across all New Mexico industries and business sectors.

At a time when the U.S. oil and gas industry is creating jobs, increasing domestic production and tax revenues, and North American energy independence is nearly within our grasp, one would think the president would claim credit and campaign on this success. Instead, he proposes to make oil and gas production more costly while spending taxpayers’ dollars in support of renewables like wind, solar and biofuels, which are ineffective, inefficient and uneconomic.

Through the 2009 stimulus bill, nearly $100 billion has been allocated to green energy projects – of which more than 50 have gone bankrupt or are facing financial difficulties. Despite the administration’s generosity toward its friends, the Energy Information Administration reports that wind power accounted for a mere 3.4 percent of the nation’s electricity in 2012, while solar provided only 0.11 percent.

Taxes are often used to prevent activity or punish it – cigarettes, alcohol. Economists say, when you tax something, you get less of it. With the U.S. population continuing to increase and government forecasting increasing global need for oil and natural gas far into the future, this is hardly the time to discourage production.