Wednesday, February 22, 2012

Tax Reform Calls For Elimination Of Oil & Gas Tax Preferences

Feb 22: President Obama released what he is calling a "Framework for Business Tax Reform." The President said, "In my State of the Union, I laid out a blueprint for an economy that's built to last -- where everyone gets a fair shot, everyone pays their fair share, and everyone plays by the same set of rules.  That includes a tax code that rewards companies who invest and create jobs in the United States of America. Our current corporate tax system is outdated, unfair, and inefficient. It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world. It is unnecessarily complicated and forces America's small businesses to spend countless hours and dollars filing their taxes. It's not right, and it needs to change. 

    "That's why my administration released a framework for reform that simplifies the tax code, eliminates dozens of tax loopholes and subsidies, and promotes job creation right here at home.  It's a framework that lowers the corporate tax rate and broadens the tax base in order to increase competitiveness for companies across the nation. It cuts tax rates even further for manufacturers that are creating new products and manufacturing goods here in America. Finally, because no company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas, this framework includes a basic minimum tax for every multinational company. This reform is fully paid for, and it won't add a dime to the deficit.

    According to information from the Administration, the President's Framework would eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth. It would reinvest the savings in reducing the rate from 35 percent to 28 percent. The combination of a broader base and a lower rate would alleviate a number of the significant economic distortions identified above that cause businesses to base investment decisions on tax rules rather than economic returns. Furthermore, this would encourage greater investment here at home and reduce incentives for U.S. companies to move their operations abroad or to shift profits to lower-tax jurisdictions. Where appropriate, the changes would allow adequate transition periods to permit affected parties to adjust to the new permanent tax rules. Finally, this reform would bring certainty to a business tax code that annually features the expiration of dozens of business tax incentives. Many of these temporary provisions would be eliminated and those that remain would be made permanent -- helping to improve incentives to allocate capital efficiently and to simplify the tax code.

    Among other items, the proposal calls for elimination of "oil and gas tax preferences." According to the Framework, "The tax code currently subsidizes oil and gas production through tax expenditures that provide preferences for these industries over others. The Framework would repeal tax preferences available for fossil fuels. This includes, for instance, repealing the expensing of intangible drilling costs, a provision that allows oil companies to immediately write-off these costs rather than recovering the cost over time as for most capital investments in other industries. This also includes repealing percentage depletion for oil and natural gas wells, which allows certain oil producers and royalty owners to recover the cost of oil and gas wells based on a percentage of the income they earn from selling oil and gas from the property rather than on the exhaustion of the property. Percentage depletion allows deductions that can exceed the cost of the property."
    Some other items include:  refocusing the manufacturing deduction and using the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy; eliminating incentives to locate production overseas or engage in accounting games to shift profits abroad; and provide tax reform to make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns.
    Specifically on clean energy, the Framework indicates, "The President's Framework would make permanent the tax credit for the production of renewable electricity, in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar. As with the R&E Tax Credit, the United States has to date provided only a temporary production tax credit for renewable electricity generation. This approach has created an uncertain investment climate, undermined the effectiveness of our tax expenditures, and hindered the development of a clean energy sector in the United States. In addition, the structure of renewable production and investment tax credits has required many firms to invest in inefficient tax planning through tax equity structures so that they can benefit even when they do not have tax liability in a given year because of a lack of taxable income. The President's Framework would address this issue by making the permanent production tax credit refundable."
    The U.S. Chamber of Commerce issued a release and President and CEO Thomas Donohue issued said, "It's appropriate for the White House to acknowledge that the corporate tax code stifles economic growth, undermines the competitiveness of U.S. firms, and needs reform. We welcome the opportunity to work with the administration and Congress to improve the system, strengthen the economy, and help American companies compete and win. However, we're disappointed the White House proposal does not adopt a territorial tax system that would put an end to the double taxation of profits earned by U.S. companies overseas. America is the only major country that disadvantages its own firms competing globally. These companies employ millions of Americans here at home and make significant contributions to our economy.

    "Also, we will be forced to vigorously oppose pay-fors that pit one industry against another or lavish favors on some while punishing others. What's really needed is a comprehensive overhaul of the entire system that broadens the tax base, lowers rates for individuals and corporations, and simplifies compliance. Such reform would be a boon to economic growth, jobs, and American competitiveness."
    Access the statement from the President (click here). Access a release from the Administration (click here). Access the 25-page Framework (click here). Access a release from the U.S. Chamber (click here).
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