Oil industry tax breaks face the ‘fiscal cliff’

11 13, 2011 by The Hill

The oil industry’s long record of success in defending its tax breaks faces new tests as lawmakers and the White House negotiate to avoid the “fiscal cliff.”

House Speaker John Boehner (R-Ohio) won’t rule out targeting oil-industry deductions in a broad deal to avoid the higher income tax rates and deep automatic spending cuts set to take effect in 2013.

“The details will have to be negotiated. Not going to speculate on what a final package may look like,” Boehner spokesman Kevin Smith told The Hill.

The Speaker is seeking a deal with the White House that would include new tax revenues without raising rates, a stance that has shifted the focus to the deductions and loopholes in the IRS code.

The American Petroleum Institute (API), the industry’s biggest lobbying group, is bracing for fresh attacks against incentives that oil companies say are nourishing the nation’s oil-and-gas production boom.

The group is announcing a TV and print ad campaign Tuesday aimed at shoring up support for the billions of dollars in deductions that companies receive on drilling costs, income from domestic projects and other areas.

API CEO Jack Gerard told reporters last week that lawmakers shouldn’t tinker with specific industries’ deductions outside of comprehensive tax code reform, which he believed would begin in earnest next year.

“The oil-and-gas industry will not be singled out for punitive treatment,” Gerard said.

Republicans and oil-state Democrats in recent years have helped the industry fight off an array of White House- and Democratic leadership-led efforts to nix the deductions.

Some bills have targeted only the “Big Five” oil companies, such as Exxon and Chevron, while others would reach independent producers too. All have failed.

But Boehner, who is battling calls from Democrats to raise tax rates on the wealthy, has taken a more conciliatory tone since President Obama’s reelection while signaling openness to raising revenues.

Capitol Hill Democrats, meanwhile, are readying fresh attacks against the oil industry.

Aides to Democrats including Rep. Sandy Levin (Mich.), the top Democrat on the House Ways and Means Committee, and Sen. Robert Menendez (N.J.) said Monday that they would seek to end oil-industry tax breaks in talks regarding the fiscal cliff.

And while any final deal will get hammered out behind closed doors, environmentalists and perhaps some Democrats will seek to ramp up public pressure over what they call unneeded taxpayer support for a profitable industry.

A spokesman for Senate Majority Leader Harry Reid (D-Nev.) said bringing a bill to the floor in the lame-duck session that strips the oil industry of its deductions is a “possibility.”

Josh Saks, legislative director with the National Wildlife Federation, said the GOP-dominated House is a tougher challenge than the Senate when it comes to building support for nixing the breaks. He said his group is looking to work with Rep. Jeff Flake (R-Ariz.), who will move over to the Senate in January, and Rep. Steven LaTourette (R-Ohio), a centrist who is not returning to Congress.

Oil Change International, which opposes fossil-fuel subsidies, and allied groups are planning a TV and online ad campaign during the lame-duck session that calls for ending the tax breaks in a fiscal deal.

Steve Kretzmann, the executive director of Oil Change International, said the political landscape has become more conducive to ending various forms of taxpayer support for the fossil fuel industry.

“I think on the shortlist of things that may be politically possible to raise revenues from, the very profitable and very successful fossil-fuel industry in the United States is on it,” he said. “There is political space, for sure.”

Market analysts are predicting the industry deductions will be at risk as the fiscal-cliff negotiations unfold.

“[T]ax incentives for oil companies that encourage investment may return to the focus as well,” Moody’s said in a wide-ranging post-election analysis Monday, noting White House opposition to various deductions.

“The administration believes the energy industry needs no assistance at a time of tight federal budgets and disputes over government spending. The Obama administration may try to end tax incentives for [exploration and production] companies, removing depletion allowances and deductions for intangible drilling costs for [exploration and production] companies,” Moody’s said.

But it remains unclear what specific industry deductions might be up for discussion.

While some tax break repeal proposals in recent years would only target major integrated companies, the White House’s fiscal 2013 budget plan called for raising roughly $40 billion over 10 years with a plan that would hit “Big Oil” and, in some cases, independent producers.

The White House plan would repeal the so-called percentage depletion allowance, which isn’t available to the big integrated companies, as well as repeal expensing of “intangible” drilling costs, which is fully available to independent companies and partially for the others, among other provisions.