The Hidden Entitlements
8. Oil, gas and energy tax breaks
Oil and gas companies are allowed to write off many of their capital costs immediately, and many can take deductions for so-called "percentage depletion"--which has no connection with actual expenses. The purpose of these tax subsidies is to encourage domestic oil and gas production--and
apparently consumption.
Having provided these subsidies, Congress then has recognized that it is not in the national interest to encourage oil and gas consumption. But rather than repealing the oil and gas tax breaks, it has instead provided additional,conflicting subsidies for alternative fuels and conservation. To make matters even more confusing, one of the largest alternative fuel subsidies is for gasohol, which some argue may use almost as much fuel to produce as it ostensibly saves. In total, the conflicting tax breaks for oil, gas and energy are expected to cost $21 billion over the next seven years.
Exploration and development costs. Normally, businesses can writeoff their investments in plants and equipment only as those investments wear out. Oil companies, however, can write off their so-called "intangible drilling costs," that is, much of their investments in finding and developing domestic oil and gas wells, immediately, even for successful wells.18 (Major, integrated oil companies can immediately deduct only 70%of such investments and must write off the remaining 30% over five years.)A similar tax break is granted for the costs of surface stripping and the construction of shafts and tunnels for other fuel minerals.
Percentage depletion. Independent oil and gas (and other fuel mineral)producers are generally allowed to take so-called "percentage depletion"deductions rather than writing off actual costs over the productive life of the property based on the fraction of the resource extracted. Since percentage depletion deductions are simply a flat percentage of gross revenues, unlike depreciation or cost depletion, percentage depletion deductions can greatly exceed actual costs! Percentage depletion rates are 22% of gross income for uranium, 15% for oil, gas and oil shale, and 10% for coal. The deduction is limited to half of the net income from a property, except for oil and gas, where the deduction can be 100%. Production from geothermal deposits is eligible for percentage depletion at 65% of net income.
Oil and gas exception to passive loss limitation. Although owners of working interests in oil and gas properties are subject to the alternative minimum tax, they are exempted from the "passive income" limitations.This means that the "working interest-holder," who manages on behalf of himself and all other owners the development of wells and incurs all the costs of their operation, may use oil and gas "losses"to shelter income from other sources.
Alternative fuel production credit. A credit of $3 per barrel (in 1979 dollars) of oil- equivalent production is provided for several forms of so-called "alternative fuels." (It is available as long as the price of oil stays below $29.50 in 1979 dollars). Alternative fuels include shale oil, natural gas produced from hard-to-access places and garbage,and synthetic oil and gas produced from coal. Production of many of these fuels has been criticized as environmentally detrimental.
Alcohol fuel credit. Manufacturers of gasohol (a motor fuel composed of 10% alcohol), get a tax subsidy of 54 cents per gallon of alcohol used.19This enormous subsidy has produced big profits for Archer-Daniels-Midland,the nation's chief gasohol producer. But although the subsidy is designed to encourage substitution of alcohol for petroleum-based gasoline, it's not clear that it has actually saved much if any oil consumption. That's because production of the corn used to make the alcohol is itself quite energy intensive.
New technology credits. A 10% credit is available for investment in solar and geothermal energy facilities. In addition, a credit of 1.5 cents is provided per kilowatt hour of electricity produced from renewable resources such as wind and bio mass. The renewable resources credit applies only to electricity produced by a facility placed in service before July 1, 1999.
Credit and deduction for clean-fuel vehicles and property. A 10%tax credit is provided for purchases of electric vehicles. There also is a tax deduction for other clean-fuel burning vehicles and their refueling facilities.
Exclusion of utility conservation subsidies. Subsidies by public utilities for customer expenditures on energy conservation measures are excluded from the gross income of the customers.
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