Contact: Matt Dempsey matt_dempsey@epw.senate.gov 202-224-9797 

Inhofe Floor Speech - Sanders Amendment 4318

Washington, D.C. - Sen. James Inhofe (R-Okla.), Ranking Member of the Senate Committee on Environment and Public Works, yesterday delivered a Senate floor speech on an amendment by Sen. Bernie Sanders (I-Vt.), S.4318, which would repeal tax allowances for oil and natural gas producers.

Something which was just called to my attention is the Sanders Amendment which:

• Repeals expensing for intangible drilling costs (IDC),
• Repeals percentage depletion for marginal oil and gas wells, and
• Repeals the manufacturing deduction for oil and gas production.

I predicted the spill in the Gulf of Mexico would be used as an opportunity to shut down domestic oil and gas wells - many of which are owned and operated by independent oil and gas producers throughout the country.  That's what's happening in the Senate bill.

Repealing expensing of intangible drilling costs eliminates the ability to expense intangible drilling and development costs (IDC) which would significantly curtail the operating budgets of exploration and production companies big and small.  Many natural gas producers estimate that capitalizing intangible drilling costs would force at least a 25 to 30 percent reduction in their drilling budgets, leading to lost jobs, lost production, and higher prices for the consumer.  And, despite the rhetoric, IDC expensing is firmly grounded in sound accounting practices and principles, and has been in the tax code since 1913.  IDC expensing is similar to expensing by other companies for technology, wages, fuels which other industries expense for their operations.

Likewise, since 1926, small producers and millions of royalty owners have had the option to utilize percentage depletion to both simplify and account for the decline in the value of minerals produced from a property.  Percentage depletion recognizes that oil and gas reservoirs are depleted by production so it is the amount which small producers can expense to reinvest in production.  The current production limits are 1,000 barrels of oil or 6,000 mcf of natural gas production daily.  Percentage depletion is particularly important for the production from America's over 600,000 low-volume marginal wells.  The average marginal well produces barely 2 barrels per day, yet cumulatively they account for nearly 28 percent of domestic production in the lower 48 states. Since every on-shore natural gas and oil well eventually declines into marginal production, the economic life span and corresponding production of nearly all natural gas and oil wells would be reduced through the elimination of percentage depletion. 

Finally, Congress has already frozen the manufacturer's tax deduction specifically for only oil and natural gas companies less than 2 years ago.  All other domestic manufacturing can deduct income at a higher rate than oil and gas companies.  Repealing the entire deduction for oil and gas companies is only targeting oil and gas production for discriminatory treatment.  

We need to remember a couple of very important points when we seek to target certain industries for tax treatment.  First, oil and gas companies employ Americans and fund our communities.  Oil and gas companies employ over 9 million people in the U.S.  Approximately 3 million land and mineral owners from coast-to-coast are the beneficiaries of monthly checks from the royalties produced on their properties.  Many of these individuals are small property owners and family farms.  In fact, the National Association Royalty Owners have ranked this as its number one concern on its website today.  States annually collect billions of dollars in oil and gas excise and severance taxes that furnish critical funding of roads, schools, and law enforcement.  By punishing America's oil and gas industry, this amendment only puts employment and state and local funding in peril.

Secondly, punishing our oil and gas industry only makes us more dependent on foreign sources of energy.  After President Jimmy Carter imposed a Windfall Profits Tax on the oil and gas industry back in 1980, the nonpartisan Congressional Research Service later determined that its results were hugely counterproductive finding, "The WPT reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent... This made the U.S. more dependent upon imported oil." 

America's natural gas and oil companies are already paying taxes at the highest rates. Figures from the Energy Information Agency indicate that America's major oil producers already pay on average more than a 40% income tax rate.

The EIA also reported in December 2009,  that on average, 53% of oil and gas companies net incomes are paid in taxes compared to 32% from others in the manufacturing sector.

Now is not the time to group the entire oil and gas industry together for punishment.  Punishing the entire industry in the sledge hammer approach this amendment uses only increases the cost of energy for all Americans, hurts our economy, and increases our reliance for foreign sources of energy.

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