A primary goal of Ways and Means Committee Chairman Dave Camp's tax reform proposal is to reduce overall tax rates by eliminating what some see as wasteful tax breaks. One of his biggest targets is the energy sector of the economy. The oil and gas industry lose some of its long-standing tax breaks, but not as many as initially feared. It is renewable energy that takes the biggest hit.
The good news for oil and gas companies, both large and small independent producers, is that the all-important intangible drilling costs deduction (IDC) remains intact. The IDC has been a part of the tax code for 100 years. It allows oil and gas companies to deduct expenses for a wide range of exploration and production costs.
The bill does propose dramatically changing a number of energy tax provisions that have been invaluable for domestic oil and gas production. Leaders of the major oil and gas companies were quick to attack the proposal. The CEO of the American Petroleum Institute announced that there were "serious flaws" in the discussion draft, including changes in the so-called LIFO accounting method, which is considered essential by major oil and gas companies. LIFO allows oil and gas companies to determine income over the course of their operations because of rising prices or possible inflation.
For small independent producers, the percentage depletion deduction encourages the exploration and operation of marginal wells, encouraging risk taking. Industry groups claim the alterations will discourage small independent producers from making the necessary investments and will hurt the production in marginal wells, which account for 20 percent of domestic oil production. In addition, the proposed changes in the passive loss exception will impact the ability of small oil and gas companies from raising capital from private investors for financing projects.
The renewable energy industry is the biggest loser in Chairman Camp's tax reform proposal. The Production Tax Credit (PTC) has been critical to renewable energy development and production. With the PTC, projects are constructed and placed into service; without it development stops. Equally important to the solar industry is the Investment Tax Credit (ITC). The Camp proposal allows both the PTC and the ITC to expire.
In addition, a critical component of the PTC is that companies can receive the benefit of the credit when they start construction. This has been especially important for renewables like geothermal that have long lead times before a project is placed in service. Chairman Camp's bill changes the standard for beginning construction in order to qualify for the PTC and overturns an IRS ruling that did not mandate developers to prove a continuous construction to stay eligible for the credit, as long as they were placed in service by the end of 2015. This retroactive provision puts existing incentives at risk.
The biggest question is whether lowering the overall corporate rate will make up the loss of these tax breaks that have been the bedrock of the energy industry for decades. With the introduction of the Camp tax reform proposal, that debate has started.