Our energy system has changed since 1913 – why hasn’t this subsidy?

1901 cartoon depicting John D. Rockefeller

The Subsidy That Time Forgot

Let’s set the stage: the year was 1913 and the Rockefeller name was dominant in American oil and wealth.

While the United States was earning its place in the global community of nations, Standard Oil was running through its veins. The company amassed huge profits but was a monopoly that kept smaller companies at bay. Breaking into the oil business was a risk – technology used for drilling had not yet been standardized and the high costs of drilling a new well, with the risk of it being dry, created a large barrier to entry.

The government eventually decided to intervene. In the same year that the Federal Income Tax was established, the United States government created the Intangible Drilling Costs (IDCs) subsidy for the oil industry. The goal was to make an opening through which new companies could better compete with Standard Oil.

Here’s the catch: Standard Oil has long since been broken up yet the subsidy designed to do so has only grown over its 100-year lifespan in terms of total value to the industry.

100 Years Later

Our country is filled with acres of untouched lands swelling with nature. From rushing rivers in the mountains that feed the farmlands in the Great Plains to the rocky coasts filled with bustling hubs of people. There’s a connection between communities and the environment that surrounds them.

But the peace is not long kept. In some places, the birds cannot be heard over the sounds of machinery rolling in. The trees no longer reach far into the sky as they are cut down and cleared away. The streams no longer harbor the life they once did and many are unsafe for humans as oil and other toxic chemicals seep in.

When forced to live alongside oil and gas drilling, it’s people and the planet that pay the price. The oil and gas industry has left their devastating mark across the nation. It would make sense if the costs to these fossil fuel companies would encourage them to think twice about drilling new wells.

But the opposite is often true.

Instead of fines, fossil fuel producers are given tax breaks to expand their polluting ways. One particularly egregious and dated tax break allows oil and gas companies to write off all “intangible drilling costs”, which include most expenses associated with drilling and development for the production of oil and gas.

These write-offs include the wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production as well as development work done by contractors and drilling exploratory boreholes to determine the presence and location of hydrocarbon deposits, even if there is no intent to produce hydrocarbons,¹ according to the IRS. This means that multibillion-dollar companies are getting huge kickbacks for actions that endanger our communities and our planet.

Unless we get rid of this subsidy, integrated companies such as Exxon and Shell are expected to receive $1.59 billion in tax breaks in 2017 alone, shifting the burden to average American taxpayers.² Within ten years, that means the government will lose out on roughly $10-13 billion dollars in revenue (see figures 1 & 2).

$10-13 billion is a massive amount of money in an era of budget cuts and government deficit, especially when it’s being handed to some of the biggest and most polluting companies on the planet.

With the surplus of funding that would come from repealing the IDC subsidy, the Federal government could fund or upkeep current programs that will suffer cuts in 2017.³ The government would have billions of dollars to allocate to previously cut programs or would have a surplus of funding for new programs, such as Zika Virus research and prevention.

The Times Have Changed

While breaking up the big monopolies was a laudable goal 1913, continuing this tax break in the name of supporting independent companies is misleading. Standard Oil is out of the picture while multi-billion dollar companies like ExxonMobil and Shell are able to deduct costs associated with drilling a well.

Chesapeake Energy, another multi-billion dollar company, has paid near a 1% tax rate over a 23 year period from 1989 until 2012, thanks in part to Intangible Drilling Cost tax breaks, according to Bloomberg in 2012.⁴

The oil and gas industry is now trying to position this tax break as assistance for ‘research and development’, something other industries, such as pharmaceutical companies, receive,⁵ but that’s a false equivalence.

According to Taxpayers for Common Sense, “producers repeatedly use the same or substantially similar equipment and processes on well after well. Little or no new information regarding development, improvement, or design occurs when this happens, but developers can still immediately deduct the costs of designing and fabricating these drilling platforms. At this point in the technological development of the industry, the IDC deduction only serves to subsidize the business generally by allowing certain taxpayers to avoid the capitalization rules applying to other taxpayers.”⁶

According to the non-partisan Committee for a Responsible Federal Budget, “This is the largest tax preference specifically for oil and gas and totaled about 8 percent of the total value of tax preferences for energy and natural resources in 2013.”⁷

Existing technology has made oil and gas drilling far less risky than it was 100 years ago when this subsidy was created.⁸ It’s time to eliminate this subsidy and put our tax dollars to better use. It is time to stop funding antiquated deductions and to start addressing climate change proactively. With the climate impacts of fossil fuel drilling worsening every year, continuing these subsidies is both shortsighted and dangerous. It is time to keep oil, gas, and coal in the ground.

FIGURE 1

Office of Management and Budget’s report for 2017: Repeal expensing intangible drilling costs (Deficit decrease in millions)

FIGURE 2

Joint Committee on Taxation: Estimated Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year 2017 Budget Proposal (Amount in millions)

[1] https://www.irs.gov/publications/p535/ch07.html
[2] Joint Committee on Taxation-JCX-15-16 at 4 (2016).
[3] https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/budget.pdf
[4] http://www.bloomberg.com/news/articles/2012-07-02/cheaspeake-s-1-tax-rate-shows-cost-of-drilling-subsidy
[5] http://www.api.org/~/media/files/policy/taxes/repeal_expensing_of_intangible_drilling_cost.pdf
[6] http://www.taxpayer.net/images/uploads/Understanding%20Oil%20%20Gas%20Subsidies(2).pdf
[7] https://www.hks.harvard.edu/fs/jaldy/img/2THP_15WaysFedDeficit_Prop5.pdf
[8] http://crfb.org/blogs/tax-break-down-intangible-drilling-costs