Ed Longanecker: A stealth national energy tax is in the $3.5 trillion reconciliation package

Wed, September 15, 2021

Advocates for the behemoth $3.5 trillion reconciliation package under consideration in Congress argue that this bill is necessary to jump-start our economy, fund social programs to make us more like Europe, and usher in the low-carbon energy transition that will bring us to net-zero emissions.

We should all remain skeptical.

Buried deep in the original draft of this massive spending measure were policies that would increase energy costs for consumers and undermine our nation’s push for energy independence. This included eliminating long-standing tax policies affecting things such as intangible drilling costs and percentage depletion.

Some sanity prevailed earlier this week when the House Ways and Means Committee released a draft that removed these extreme rollbacks. But opponents of the energy industry have cried foul and have promised to up the pressure on the Senate to reimpose these punitive measures.

Doing so would put a bull's-eye on independent energy producers. While Big Oil is the preferred term among anti-oil and gas advocates, the truth is that about 90% of wells in the United States are drilled by independent energy producers, most of which are small and mid-sized companies. These independent companies produce about 83% of U.S. oil and 90% of U.S. natural gas.

For over 100 years, the intangible drilling and development costs deduction has spurred new capital investment for the high-risk business of exploring for, and developing, American oil and natural gas. While drilling costs are unique to drillers, the deduction of costs is similar to cost-recovery provisions provided to every business sector. IDC deductions are also not true subsidies like those in other energy sectors. Drillers still must pay the full amount of taxes that are owed, contrary to what one might conclude based on news headlines and the hyperbolic language in Washington, D.C.

Removing this tax provision would not only strip away roughly 25% of the capital available for independent producers, but it would also diminish the many economic benefits created by domestic exploration and production activities.

Meanwhile, the percentage depletion deduction has been a part of the U.S. tax code since 1926. All mineral natural resources are eligible for a percentage depletion income tax deduction — not because lawmakers are trying to “subsidize” oil companies, but rather to reflect the decreasing value of the resource as it is produced. Percentage depletion allows independent producers to reinvest cash into the expenses of existing wells and redeploy capital to drill new wells. And contrary to the Big Oil framing, this deduction only applies to smaller independent producers and to royalty owners.

Other targets include the amortization of certain expenditures, enhanced oil recovery, and tertiary injectant expenses — all of which are highly technical and easy to overlook. But make no mistake, punishing the energy industry with these policies will put men and women out of work and raise energy costs for everyone.

Although the Ways and Means Committee wisely removed those harmful policies, some very troubling items remain in the bill. Notably, the current bill actually contains a national energy tax, dubbed a “methane fee.” This would impose a massive new tax on natural gas, raising monthly energy bills for families across the country.

Sadly, this is all part of a coordinated attack on American oil and gas producers from policymakers in Washington. President Joe Biden’s budget proposal included an estimated $145 billion in tax hikes for the energy sector, which are, of course, on top of the costs that communities across the country had to endure from the White House’s illegal ban on oil and gas leasing on federal lands that was in place for most of this year.

Intentionally advocating for policies that would bring economic hardship to millions of families and small businesses is unacceptable in good times, but it is unconscionable as we still struggle to get through a pandemic.

Targeting the oil and gas industry with higher taxes won’t solve climate change. But these policies would increase the national debt, speed up inflation, bring higher costs to consumers, and guarantee we increase our reliance on countries such as Russia and Saudi Arabia for our energy needs.

This op-ed originally appeared in the Washington Examiner. Author Ed Longanecker is president of the Texas Independent Producers and Royalty Owners Association (TIPRO). Texans for Natural Gas is a project of TIPRO.