In his 2013 State of the Union address, President Barack Obama championed our nation’s energy policy and reaffirmed his goal of cutting net oil imports in half by the end of the decade. He said, “Today no area holds more promise than our investments in American energy. After years of talking about it, we’re finally poised to control our own energy future. ... We produce more oil at home than we have in 15 years. ... We produce more natural gas than ever before and nearly everyone’s energy bill is lower because of it.” Three months later, the president released his budget proposal, which eliminates tax incentives for the oil and gas industry, calling them “tax giveaways.” The president might achieve his goal of ending what he calls “oil subsidies that keep us trapped in the past,” but he will do so at the expense of sound energy policy.
The nation’s energy policy is inextricably tied to the nation’s tax code. Tax laws are central to the development of domestic energy resources. The tax code may not be the best way to design a strategically sustainable energy policy, but for the past century, it has been the most important. In the coming months, as the congressional debate over tax reform intensifies, the nation’s energy policy should be central to that debate.
The president is right to champion the progress that has been made by the oil and gas industry during his presidency. Within the past two years, the potential supply of natural gas in the United States has increased by 26 percent. Almost half of the country’s natural-gas production has occurred within the past four years. This is a phenomenal achievement. New technologies and advancements in horizontal drilling and hydraulic fracturing have enabled the oil and gas industry to find and recover enormous reserves of natural gas. As a result, the United States now has a 100-year supply. In the near future, by making the right choices, America could become energy independent.
The tax code is in great need of reform. America’s corporate tax rate is the highest in the world, and Americans deplore the complexity and inconsistencies in the tax code. While comprehensive tax reform may not be possible in the highly partisan environment of this Congress, the potential passage of an incremental tax bill is significant. The upcoming debate over fossil fuel taxes will not only be about policy. Members of Congress will be looking for additional revenues, and the oil and gas industry is a ripe target. Eliminating the industry’s tax breaks will raise an estimated $44 billion.
In the context of fundamental tax reform, special tax breaks for every industry should be scrutinized. Nonetheless, there are tax breaks that should be preserved and have been fundamental to creating new technologies and have been the driving force behind some of the great advances in medicine, scientific research, technology, and oil and gas exploration. For example, the tax code gives all industries a tax break tied to research- and-development costs. For the technology industry, especially for new high-risk ventures, the R&D tax break has been essential. Without it, American companies would be at a great disadvantage as they compete with foreign competitors. No one suggests that in the name of simplifying the tax code or raising additional revenues, this tax break should be eliminated.
On a policy level, there is no difference between the R&D tax break and a tax break tied to intangible drilling costs that benefits oil and gas companies. The purpose of the IDC tax break is to encourage oil and natural-gas production, which is a risky endeavor even under the best of circumstances. This has been especially true for small independent oil and gas producers. The IDC tax break has encouraged the necessary risk-taking that has been critical to the historic progress of which Obama is rightfully proud.
The IDC tax break has been in the tax law for 100 years, and it has been fundamental to the success of oil and gas exploration in America. The Obama administration wants to eliminate it. To sweep it away could profoundly impede the president’s goal of energy independence. It is not sound energy policy or wise tax policy.
In the coming months, the debate over taxes and our nation’s energy policy will intensify. They are inseparable. Decisions made about one will dramatically affect the other. There is much at stake.
Michael A. Andrews is an attorney with King & Spalding. He served in Congress from 1983 to 1995. He was a member of the Ways and Means Committee. Abraham N.M. Shashy Jr. is an attorney with King & Spalding. He served as chief counsel for the IRS from 1990 to 1993.