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May 26, 2010


Democrats Set Sights on Repealing Oil and Gas Tax Breaks

The Texas oil industry is weathering tough times. The BP oil rig explosion in the Gulf of Mexico is causing a massive environmental disaster and giving the entire industry a black eye. It will almost certainly stop any expansion in offshore drilling. Meanwhile, Congressional Democrats want to repeal oil and gas tax breaks.

New revenue from oil and gas companies would help cover subsidies for Democrats’ more favored renewable energy programs.

Congress probably won’t grant President Obama’s wish of repealing all the tax breaks for oil and gas producers, but it may start with eliminating a manufacturing deduction for producers and refiners, which was established in 2004, as well as other select subsidies. A repeal of the manufacturing deduction could cost oil companies $13.3 billion.

Congress could target any of several tax breaks and incentives for oil and gas producers, and add new taxes. It could also create a broader windfall profits tax. Analysts say such a measure could hit harder than any other tax change in an industry that reaped $125 billion in profits in 2007.

A tax to clean up hazardous waste sites could be reinstated, which would reap as much as $10 billion from the oil industry. Another $11.5 billion could be raised by eliminating tax write-offs for drilling costs and lease payments.

The Obama administration is also considering new taxes for gas and oil companies. A proposed 13-percent excise tax on offshore oil and gas production would raise $5.3 billion. The administration says the tax would simply close loopholes that allow companies a tax break on royalty payments. Finally, oil companies could lose money by not producing oil. The administration hopes to collect up to $1.2 billion through a fee for companies that don’t produce anything on their leases in the Gulf of Mexico.

The changes would have a significant impact in Texas, which has more producing oil wells than any other state. On the other hand, Texas is also by far the largest national producer of wind energy, and could benefit from larger subsidies for wind power generation.

The Treasury Department estimates that eliminating tax incentives would only cut production costs about 2 percent, and cut domestic production by less than 1 percent. The US is the world’s third largest oil producer, but imports 57 percent of its oil. In 2008, the US produced 10 percent of the world’s oil and consumed 23 percent of the world’s oil.