Direct Subsidies
Intangible Drilling Costs Deduction (26 U.S. Code § 263. Active). This provision allows companies to deduct a majority of the costs incurred from drilling new wells domestically. In its analysis of President Trump’s Fiscal Year 2017 Budget Proposal, the Joint Committee on Taxation (JCT) estimated that eliminating tax breaks for intangible drilling costs would generate $1.59 billion in revenue in 2017, or $13 billion in the next ten years.
Percentage Depletion (26 U.S. Code § 613. Active). Depletion is an accounting method that works much like depreciation, allowing businesses to deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time. However, with standard cost depletion, if a firm were to extract 10 percent of recoverable oil from a property, the depletion expense would be ten percent of capital costs. In contrast, percentage depletion allows firms to deduct a set percentage from their taxable income. Because percentage depletion is not based on capital costs, total deductions can exceed capital costs. This provision is limited to independent producers and royalty owners. In its analysis of the President’s Fiscal Year 2017 Budget Proposal, the JCT estimated that eliminating percentage depletion for coal, oil and natural gas would generate $12.9 billion in the next ten years.
Credit for Clean Coal Investment Internal Revenue Code § 48A (Active) and 48B (Inactive). These subsidies create a series of tax credits for energy investments, particularly for coal. In 2005, Congress authorized $1.5 billion in credits for integrated gasification combined cycle properties, with $800 million of this amount reserved specifically for coal projects. In 2008, additional incentives for carbon sequestration were added to IRC § 48B and 48A. These included 30 percent investment credits, which were made available for gasification projects that sequester 75 percent of carbon emissions, as well as advanced coal projects that sequester 65 percent of carbon emissions. Eliminating credits for investment in these projects would save $1 billion between 2017 and 2026.
Nonconventional Fuels Tax Credit (Internal Revenue Code § 45. Inactive). Sunsetted in 2014, this tax credit was created by the Crude Oil Windfall Profit Tax Act of 1980 to promote domestic energy production and reduce dependence on foreign oil. Although amendments to the act limited the list of qualifying fuel sources, this credit provided $12.2 billion to the coal industry from 2002-2010.
Indirect Subsidies
Last In, First Out Accounting (26 U.S. Code § 472. Active). The Last In, First Out accounting method (LIFO) allows oil and gas companies to sell the fuel most recently added to their reserves first, as opposed to selling older reserves first under the traditional First In, First Out (FIFO) method. This allows the most expensive reserves to be sold first, reducing the value of their inventory for taxation purposes.
Foreign Tax Credit (26 U.S. Code § 901. Active). Typically, when firms operating in foreign countries pay royalties abroad they can deduct these expenses from their taxable income. Instead of claiming royalty payments as deductions, oil and gas companies are able to treat them as fully deductible foreign income tax. In 2016, the JCT estimated that closing this loophole for all American businesses operating in countries that do not tax corporate income would generate $12.7 billion in tax revenue over the course of the following decade.
Master Limited Partnerships (Internal Revenue Code § 7704. Indirect. Active). Many oil and gas companies are structured as Master Limited Partnerships (MLPs). This structure combines the investment advantages of publicly traded corporations with the tax benefits of partnerships. While shareholders still pay personal income tax, the MLP itself is exempt from corporate income taxes. More than three-quarters of MLPs are fossil fuel companies. This provision is not available to renewable energy companies.
Domestic Manufacturing Deduction (IRC §199. Indirect. Inactive). Put in place in 2004, this subsidy supported a range of companies by decreasing their effective corporate tax rate. While this deduction was available to domestic manufacturers, it nevertheless benefitted fossil fuel companies by allowing “oil producers to claim a tax break intended for U.S. manufacturers to prevent job outsourcing”. The Office of Management and Budget estimated that repealing this deduction for coal and other hard mineral fossil fuels would have saved $173 million between 2012 and 2016. This subsidy was repealed by the Tax Cuts and Jobs Act (P.L. 115 – 97) starting fiscal year 2018.
I think its a good start these Energy companies have taken advantage long enough.
Intangible Drilling Costs Deduction (26 U.S. Code § 263. Active). This provision allows companies to deduct a majority of the costs incurred from drilling new wells domestically. In its analysis of President Trump’s Fiscal Year 2017 Budget Proposal, the Joint Committee on Taxation (JCT) estimated that eliminating tax breaks for intangible drilling costs would generate $1.59 billion in revenue in 2017, or $13 billion in the next ten years.
Percentage Depletion (26 U.S. Code § 613. Active). Depletion is an accounting method that works much like depreciation, allowing businesses to deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time. However, with standard cost depletion, if a firm were to extract 10 percent of recoverable oil from a property, the depletion expense would be ten percent of capital costs. In contrast, percentage depletion allows firms to deduct a set percentage from their taxable income. Because percentage depletion is not based on capital costs, total deductions can exceed capital costs. This provision is limited to independent producers and royalty owners. In its analysis of the President’s Fiscal Year 2017 Budget Proposal, the JCT estimated that eliminating percentage depletion for coal, oil and natural gas would generate $12.9 billion in the next ten years.
Credit for Clean Coal Investment Internal Revenue Code § 48A (Active) and 48B (Inactive). These subsidies create a series of tax credits for energy investments, particularly for coal. In 2005, Congress authorized $1.5 billion in credits for integrated gasification combined cycle properties, with $800 million of this amount reserved specifically for coal projects. In 2008, additional incentives for carbon sequestration were added to IRC § 48B and 48A. These included 30 percent investment credits, which were made available for gasification projects that sequester 75 percent of carbon emissions, as well as advanced coal projects that sequester 65 percent of carbon emissions. Eliminating credits for investment in these projects would save $1 billion between 2017 and 2026.
Nonconventional Fuels Tax Credit (Internal Revenue Code § 45. Inactive). Sunsetted in 2014, this tax credit was created by the Crude Oil Windfall Profit Tax Act of 1980 to promote domestic energy production and reduce dependence on foreign oil. Although amendments to the act limited the list of qualifying fuel sources, this credit provided $12.2 billion to the coal industry from 2002-2010.
Indirect Subsidies
Last In, First Out Accounting (26 U.S. Code § 472. Active). The Last In, First Out accounting method (LIFO) allows oil and gas companies to sell the fuel most recently added to their reserves first, as opposed to selling older reserves first under the traditional First In, First Out (FIFO) method. This allows the most expensive reserves to be sold first, reducing the value of their inventory for taxation purposes.
Foreign Tax Credit (26 U.S. Code § 901. Active). Typically, when firms operating in foreign countries pay royalties abroad they can deduct these expenses from their taxable income. Instead of claiming royalty payments as deductions, oil and gas companies are able to treat them as fully deductible foreign income tax. In 2016, the JCT estimated that closing this loophole for all American businesses operating in countries that do not tax corporate income would generate $12.7 billion in tax revenue over the course of the following decade.
Master Limited Partnerships (Internal Revenue Code § 7704. Indirect. Active). Many oil and gas companies are structured as Master Limited Partnerships (MLPs). This structure combines the investment advantages of publicly traded corporations with the tax benefits of partnerships. While shareholders still pay personal income tax, the MLP itself is exempt from corporate income taxes. More than three-quarters of MLPs are fossil fuel companies. This provision is not available to renewable energy companies.
Domestic Manufacturing Deduction (IRC §199. Indirect. Inactive). Put in place in 2004, this subsidy supported a range of companies by decreasing their effective corporate tax rate. While this deduction was available to domestic manufacturers, it nevertheless benefitted fossil fuel companies by allowing “oil producers to claim a tax break intended for U.S. manufacturers to prevent job outsourcing”. The Office of Management and Budget estimated that repealing this deduction for coal and other hard mineral fossil fuels would have saved $173 million between 2012 and 2016. This subsidy was repealed by the Tax Cuts and Jobs Act (P.L. 115 – 97) starting fiscal year 2018.
I think its a good start these Energy companies have taken advantage long enough.
