Senate Democratic leaders and several politically vulnerable members of their caucus are introducing legislation Tuesday that would repeal several tax breaks for the largest oil companies.
The bill, which faces major hurdles, represents an escalation of Democratic efforts to criticize oil companies amid high gasoline prices and politically tether Republicans to the industry. But Democrats also say the issue is ripe for support across the aisle.
“Recently, Speaker Boehner said it is time to look at cutting oil subsidies, and Representative Ryan has endorsed cutting oil subsidies. In addition, CEO’s from the Big 5 have testified that they do not need incentives for oil exploration. For example, ConocoPhillips CEO Jim Mulva testified, ‘with respect to oil and gas exploration and production, we do not need incentives,’” the letter states.
“It is time to work on a bipartisan basis to ask oil companies to pay their fair share and help us lower the deficit,” adds the letter, which also summarizes the bill.
Co-sponsors of the bill, according to a memo Democrats are circulating, include Majority Leader Harry Reid (D-Nev.), Majority Whip Dick Durbin (D-Ill.) and other Democratic leaders. The backers also include several members facing tough reelection battles next year: Sens. Sherrod Brown (D-Ohio), Jon Tester (D-Mont.) and Claire McCaskill (D-Mo.).
Other co-sponsors include liberal Sens. Sheldon Whitehouse (D-R.I.) and Frank Lautenberg (D-N.J.).
The bill would seek to curtail several incentives for five major, integrated oil companies: BP, Exxon, Shell, Chevron and ConocoPhillips. All the savings would be steered into deficit reduction, a blow to an effort by Sen. Max Baucus (D-Mont.) to use the increased revenues from ending tax breaks to boost green fuels and vehicles programs.
Reid said he intends to begin floor debate Tuesday on the bill and said he hopes to vote on it "in the next week."
Provisions in the new bill would block deductions for certain costs related to drilling projects, end the companies' ability to claim a tax deduction on income from domestic manufacturing and production, and roll back the expansion of deepwater royalty holidays that was part of a major 2005 energy law, according to a summary of the bill.
Democrats will tout the bill at press conference Tuesday, but it’s not clear when the measure will come up for a vote.
While the Democrats are highlighting Boehner’s comments, they face massive hurdles winning GOP support. Boehner largely walked away from his recent claims that he’s open to nixing industry incentives, and the path isn't much easier in the Senate despite Democratic control of the chamber.
Sen. John Thune (R-S.D.), who heads the Senate Republican Policy Committee, attacked
the prospect of legislation that strips incentives for the major
companies and uses the money to attack the deficit.
The oil industry, most Republicans and some oil-state Democrats say that repealing incentives would raise costs and slow domestic energy development.
“I think it is going to be awfully hard to make it more expensive for people in this country to buy energy, and raising taxes right now on the companies that produce the energy is probably just going to make energy prices go up even higher,” Thune said in the Capitol Monday evening.
Here is the bill summary and letter circulating in the Senate:
I write to urge you to join me and Senators McCaskill, Tester, Sherrod Brown, Reid, Durbin, Schumer, Murray, Leahy, Reed, Bill Nelson, Lautenberg, and Whitehouse in co-sponsoring the Close Big Oil Tax Loopholes Act of 2011, which would repeal tax loopholes to the five largest, most profitable oil companies in the world: BP, Exxon, Shell, Chevron, and ConocoPhillips (“Big 5”).
Over the last decade, the Big 5 have enjoyed nearly $1 trillion in profits and tens of billions of dollars in taxpayer subsidies. The American people are demanding to know why they are stuck paying $4.00 for a gallon of gasoline while these companies rake in billions of dollars in subsidies and record profits. And they want to know why these oil companies should continue to enjoy billions of dollars in subsidies when the working class, the needy, and the elderly are being asked to sacrifice in order to balance the budget.
Recently, Speaker Boehner said it is time to look at cutting oil subsidies, and Representative Ryan has endorsed cutting oil subsidies. In addition, CEO’s from the Big 5 have testified that they do not need incentives for oil exploration. For example, ConocoPhillips CEO Jim Mulva testified, “with respect to oil and gas exploration and production, we do not need incentives.” It is time to work on a bipartisan basis to ask oil companies to pay their fair share and help us lower the deficit.
Cutting these subsidies will not result in less oil production. Currently, instead of using their enormous revenues to invest in drilling as they say they are, the Big 5 oil companies are buying back stock and issuing dividends. In other words instead of investing in increased production to lower prices or providing clean domestic alternatives to OPEC-priced oil, they are enriching their executives and their shareholders.
Summary of the bill:
Modifications of foreign tax credit rules applicable to major integrated oil companies which are dual capacity taxpayers. U.S. taxpayers are taxed on their income worldwide, but are entitled to a dollar-for-dollar tax credit for any income taxes paid to a foreign government. U.S. oil and gas companies have been accused of disguising royalty payments to foreign governments as foreign taxes. This allows them to lower their taxes in the U.S. The bill would close this loophole that amounts to a U.S. subsidy for foreign oil production for the Big 5.
Limitation on deduction for income attributable to the production of oil, natural gas, or primary products thereof: In 2004 Congress enacted Section 199, the domestic manufacturing tax deduction. In 2008 Congress froze the Section 199 deduction at 6% for all oil and gas activity. The bill eliminates the Section 199 deduction for the Big 5.
Limitation on deduction for intangible drilling and development costs: Would deny the Big 5 oil companies the option of expensing Intangible Drilling Costs (IDCs) and require such costs be capitalized. IDCs are expenditures such as wages, fuel, repairs, hauling, and supplies necessary for the drilling of oil wells. Currently, integrated oil companies can expense 70% of the cost of IDCs. The bill requires the Big 5 to capitalize all of its IDC costs.
Limitation on percentage depletion allowance for oil and gas wells: Firms that extract oil and gas are permitted a deduction to recover their capital investment under one of two methods. Cost depletion allows for the recovery of the actual capital investment—the costs of discovering, purchasing, and developing the well—over the period the well produces income. Under this method, the taxpayer’s total deductions cannot exceed its original investment. Percentage depletion allows the cost recovery to be computed using a percentage of the revenue from the sale of the oil or gas. Under this method, total deductions could (and often do) exceed the taxpayer’s capital investment. The bill repeals percentage depletion for the Big 5.
Limitation on deduction for tertiary injectants: Tertiary injectants are used in enhanced oil recovery to drive more oil from an existing well. Currently, oil companies are allowed to deduct the cost of tertiary injectants rather than capitalizing their costs and recovering them over time. The bill requires the Big 5 to capitalize the cost of tertiary injectants it uses during the year and recover those costs over time.
Repeal of Outer Continental Shelf deep water and deep gas royalty relief: Repeals Sections 344 and 345 of the Energy Policy Act of 2005. Section 344 extended existing deep gas incentives and Section 345 provided additional mandatory royalty relief for certain deepwater oil and gas production. These changes will help ensure that Americans receive fair value for Federally-owned fossil fuel resources.
Deficit Reduction: All savings realized as the result of the bill’s elimination of the tax breaks and other subsidies currently going to the major integrated oil companies are devoted to deficit reduction.