Six years after he sent his first budget proposal to Congress, President Barack Obama still wants to repeal some tax credits for the oil and natural gas industry. That would be a huge mistake.
Without tax deductions for expenses like intangible drilling costs — which are costs that cannot be recovered in oil and gas drilling, such as site preparation and labor — we would probably not have had the dramatic 35 percent increase in U.S. oil and natural gas production since 2008. Nor would we have seen a rebirth of U.S. manufacturing and a stronger economy, the creation of hundreds of thousands of well-paying jobs from the shale revolution, increased revenue for governments, less dependence on imported oil, and enhanced geopolitical advantage.
Though each of his proposals has been dead on arrival in Congress, Obama’s new budget for the 2015 fiscal year would impose an additional $97 billion in taxes on oil and gas companies over the next decade. Oil and gas companies already pay $85 million a day in taxes to the U.S. Treasury.
That adds up to more than $30 billion a year — and oil and companies pay one of the highest effective tax rates at 44 percent compared to an average of 30 percent for the rest of the nation’s major industries.
Team Obama doesn’t even try to win support for its energy tax proposals anymore.
Instead, they spend all their effort trying to prove they weren’t wrong about wanting to repeal tax deductions like the intangible drilling allowance.
For example, Obama wants to repeal tax credits that encourage the use of marginal wells, a source of one-fifth of the nation’s oil production.
Once shut down, marginal wells are lost forever.
Eliminating the marginal-well deduction would place more than 100,000 U.S. jobs at risk.
Almost all of the nation’s marginal wells — so-called “stripper” wells that yield an average of only 2.2 barrels of oil per day — are operated by small, independent oil companies or family businesses. In Michigan, stripper wells account for more than 50 percent of the state’s oil production but 95 percent of the oil wells.
Eliminating the deduction for marginal wells would force families with stripper wells to pay more in federal taxes, which are already far higher than for other businesses. This would put the owners of stripper wells at a serious disadvantage.
To be profitable, an oil or gas well, like any other business, must generate enough revenue through the sale of a product to a refiner to pay all of the costs associated with the production and maintenance of the well. These costs can run from a few hundred to several thousands of dollars per month. And the producers, like farmers, do not set the price of the product that they produce. Rather, they are at the mercy of the commodity markets.
As a result, the operator of a small oil or gas well — there are more than half a million wells in the United States that produce less than 15 barrels of oil per day — does not have the ability to pass along costs resulting from increased taxes to consumers, as other “end product” businesses can do.
This can cause wells to reach or exceed their economic limit sooner than they otherwise would, reducing the amount of oil available to consumers.
This loss of production also costs states and counties to lose tax revenues, which would negatively affect Michigan.
Mark J. Perry is a professor of economics at the Flint campus of the University of Michigan and a resident scholar at The American Enterprise Institute.