House Ways and Means Chairman Dave Camp released his highly anticipated proposal to overhaul the tax code today, aiming to eliminate lucrative tax breaks that touch all energy sectors within a broader draft targeting economywide preferences in pursuit of a lower overall tax rate.
The proposal is similar to drafts issued last year by then-Senate Finance Chairman Max Baucus. But in the energy space, at least, early indications are that the draft from Camp (R-Mich.) would be more favorable to oil and gas companies and less favorable to renewable energy firms than ideas offered by the Montana Democrat.
Despite earlier fears, oil and gas interests didn't make out as badly as some in the industry had feared, although the American Petroleum Institute was still quick to criticize the proposal. Camp's plan would maintain the lucrative intangible drilling costs deduction, which exploration and production companies use to write off expenses ranging from drill bits to workers' salaries.
But it would eliminate several other proposals, such as companies' ability to use "last-in, first-out" accounting rules to lower the taxable value of their stored inventory and the percentage depletion deduction for oil and gas wells. The proposal also gets rid of the so-called Section 199 domestic manufacturing incentive for all companies, including those in the oil and gas industry. And it repeals credits for enhanced oil recovery and marginal wells, but neither has been in place for years because oil prices remain above the threshold where they could be claimed.
The draft also would eliminate a loophole that exempts certain oil producers from paying into the spill liability trust fund. Camp proposes extending a 9-cent-per-barrel excise tax through 2023 and expanding the definition of crude oil to which it applies to include oil sands, shale oil, condensates and other types of liquid fuels that had been exempted (E&E Daily, June 18).
API President Jack Gerard in a statement pointed to "serious flaws" in the proposal, dealing with LIFO and other matters, warning that "higher taxes" on the industry would hurt the economy by "undermining private investment, job creation, energy production and government revenue."
Independent Petroleum Association of America President Barry Russell in a separate statement praised Camp's decision to leave the intangible drilling costs deduction untouched but said he was concerned by other proposals, such as the elimination of percentage depletion.
Renewable firms appear to be big losers under the proposal. Not only would Camp not reinstate expired clean energy incentives such as the renewable energy production tax credit (PTC), he also would dramatically reduce payments to companies still eligible for the credit.
Under current law, renewable energy developers -- primarily in the wind industry -- can claim the PTC for the first 10 years of a project's life span. The value of the credit has risen with inflation since it was first implemented in 1992 and currently stands at 2.3 cents for every kilowatt-hour of electricity produced. Camp's proposal would eliminate that inflation adjustment, meaning that if it became law today, any projects still claiming the credit within that 10-year window would receive a lower deduction in future years.
The proposal also would repeal a production tax credit for new nuclear facilities. An investment tax credit (ITC) that currently covers 30 percent of project costs and primarily supports solar development would remain in place through its scheduled expiration in 2016 and not be extended beyond that. It also would eliminate a 10 percent ITC that would remain in place under current law.
Baucus also would have eventually eliminated the resource-specific credits such as the PTC, ITC and various biofuels credits. But he would have replaced them with a pair of technology-neutral credits to continue providing incentives for low-emissions electricity and fuel; Camp's draft includes no such language.
Camp says the time is right to overhaul the tax code for the first time since 1986 to boost the struggling economy, but Republican leaders in both chambers have downplayed the likelihood that his bill would gain traction this year. Still, even if tax reform doesn't happen this year, Camp's proposal provides a marker for proposals likely to be assembled next year and beyond.