Buried within the thousands of pages of the Obama Administration’s proposed budget for 2011 are billions upon billions of dollars in new taxes. Calling many of the tax increases “loophole closers,” the budget clearly states the president’s intent to repeal “subsidies for fossil fuels so that we can transition to a 21st century energy economy.”
Because the current oil and gas tax code is quite technical and covers such a wide range of exploration and production issues, the administration is attempting to get by with a one-paragraph elimination of oil and gas incentives which would be valued at nearly $37 billion over the next decade—and beyond. The administration likes to point to what it calls “obscene profits” of a few of the multi-national companies, saying “they don’t need incentives.”
The budget targets eight incentives for repeal, but just three of the provisions will bring in 96% of the $37 billion total. One of the easier to explain provisions is the Section 199 manufacturing deduction. This deduction was created as part of the 2004 American Jobs Creation Act and is known as the “Domestic Production Activities Deduction.” Its purpose was to create American jobs and stop the export of manufacturing jobs.
The fiscal year 2011 budget would take away the credit, but only for the oil and gas industry, to the tune of $17 billion over the decade. A 2008 study by the Institute for Energy Research projected that the loss of this deduction for oil and gas would reduce total household earnings by almost $35 billion and the U.S. economic output by $186 billion over the next decade.
This 6% tax credit was also granted to serve another purpose: to slow the importation of foreign oil and natural gas by encouraging domestic production. So, the administration talks of reducing oil imports; instead, it kills domestic production. Meanwhile, imported crude hovers at about 60% of our domestic use.
Then there’s the elimination of “intangible drilling costs,” another $7.8 billion dollars in lost incentives; and “percentage depletion,” another $10 billion. On top of the “lost incentives,” there will be increases in rents, bonuses and royalties on leasing and drilling in the Outer Continental Shelf. Those new OCS “fees” will be $7.2 billion in 2011 and grow to $9.5 billion in 2015.
These long-held federal “tax breaks” for fossil fuels will now be the funding source for more “clean energy” projects such as solar, wind, geothermal, biomass, and other qualified facilities. The American Recovery and Reinvestment Act of 2009 (the “stimulus bill”) funded many of the initial projects, and the to-be-lost oil and gas incentives would fund them for the next decade.
Louisiana is the number one producer of oil if you include production in the federal zone just offshore Louisiana, and is number two in natural gas production. The state has also been a net consumer of natural gas for many years, with the high concentration of petrochemical use of natural gas for feedstocks. Unfortunately, the petrochemical and manufacturing industries haven’t yet found a way to replace natural gas.
What a blow to the Louisiana economy, as well as to the national economy, if these tax incentives are eliminated! Although drilling in south Louisiana is at or near an all-time low, natural gas production in the Haynesville Shale has created an economic explosion in northwest Louisiana, just as it has in other regions of the country which have shale formations. Production of clean-burning natural gas must be the “clean energy” of the next decade, allowing a gradual transition to other forms of energy.
What the Obama Administration is proposing will do nothing but kill the domestic oil and gas industry, taking with it over 50,000 Louisiana jobs.
(Dan Juneau is the President of the Louisiana Association of Business and Industry; Ginger Sawyer, Vice President and Director of LABI’s Energy Council, contributed to this column.)