As if Washington hasn’t done enough to cause gasoline prices to spike, President Biden wants to impose further harm on the oil and gas industry.
Biden’s budget justifies the damage as eliminating subsidies, but Ed Cross, president of the Kansas Independent Oil and Gas Association (KIOGA), says that isn’t the case. Instead, he said these are tax provisions that — like such provisions for almost every industry — allow producers to recoup costs before taxes.
“These cost recovery mechanisms or tax provisions, also known in policy circles as ‘tax expenditures,’ should in no way be confused with ‘subsidy.’ i.e., direct government spending,” Cross wrote in a release.
In an interview with the Sentinel, Cross pointed out that “percentage depletion” is very similar to the tax deduction a manufacturer can take for equipment depreciation.
“Percentage depletion has been in the tax code since 1926,” Cross said. “And it’s limited to the first 1,000 barrels per day of production.
“So it’s only the small producers that get that, and it’s limited to the net income of every property. So it’s only for small wells.”
Cross said the amount deducted cannot exceed 65% of taxable income before the depletion deduction.
Since this hasn’t been available to the major oil producers for about 45 years, eliminating the tax provision would only affect the small, marginal producers predominant in Kansas.
Cross said the federal tax code defines a marginal well as producing 15 barrels of oil, or 90,000 cubic feet of natural gas per day or less.
“The average well in Kansas makes about two barrels of oil per day and about 27,000 cubic feet of natural gas per day,” Cross said. “So most wells in Kansas, not all wells, but most wells in Kansas are considered marginal wells.”
Eliminating the cost recovery provisions is estimated to raise about $2.3 billion annually for the federal government. That sounds like a lot of money, but it becomes a rounding error in a total budget of approximately $5.8 trillion.
“I’m not wanting to characterize it as nothing because that’s a lot of money,” Cross said. “But … in the bigger picture, it’s not really about raising money. It’s about getting rid of the small producers.”
The bottom line, Cross said, is that fossil fuel producers are not receiving a “subsidy” in the form of a direct payment but instead are being allowed to deduct a portion of the money they’ve spent.
“By no stretch of the imagination is the gas industry subsidized,” Cross said. “But we have cost recovery mechanisms, tax provisions, just like every other industry has — whether you call it depreciation or research and development, or (as) we call it, percentage depletion and intangible drilling costs, it’s their cost recovery tax provisions.
“You have to spend the money before you can get this.”
Cross said — at least at the moment — elimination of those deductions appears to be a non-starter for most Republicans.
Wind industry gets preferential tax treatment
Meanwhile, the wind industry has much more favorable tax provisions at the federal and state levels.
Wind companies in Kansas enjoy a 10-year property tax exemption. While they make Payments in Lieu of Taxes, or PILOT, those payments are generally significantly less than what the property taxes would have been — and are made directly to counties. While most counties receiving PILOT share the revenue with cities and school boards, they are not required.
Currently — and uniquely in the United States — Kansas not only levies property taxes on the well but also on the oil still in the ground.
“The oil and gas industry does not have a 10-year property tax exemption,” Cross said. As a matter of fact, and when I look at it, the oil and gas industry is taxed five times on each barrel of oil or 1,000 cubic feet of natural gas that we produce.
“We have a severance tax. We had the property tax on the equipment, and then we had the property tax on the reserves in the ground that we haven’t even produced yet. And then they have a state income tax and a federal income tax on top of that.”
A bill to remove the 10-year property tax exemption for wind producers, Kansas Senate Bill 374, seems unlikely to make it out of committee.
At the federal level, the Department of Energy provides a 1.5 cent per kilowatt-hour tax credit to wind companies and an “alternative Investment Tax Credit” for 12%–30% of investment costs at the start of the project.
While those credits expired at the beginning of 2022, they are still applicable to any project started — not completed, but merely started — by Dec. 31, 2021. The per-kilowatt-hour credit is for the first ten years of production for any individual turbine — and as credits, not deductions, are classical subsidies in the form of direct payments.