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US House takes on Big Oil

By Staff writer of The Christian Science Monitor / January 18, 2007

The House of Representatives is poised Thursday to play Robin Hood with energy policy.

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It aims to cut $14 billion in federal oil and gas tax breaks and other benefits over the next 10 years and give them instead to renewable-energy programs.

Such a change would represent a noticeable trim in government support for the oil and gas industry at a time when it is trying to boost domestic production. It would provide a huge boost to renewable energy industries as they try to replace fossil fuels with cleaner energy that's also domestically produced.

Nevertheless, the proposed cuts go only so far. Even if the House's new clean-energy legislation becomes law, the oil and gas industry will remain by far the largest recipient of federal energy largesse, receiving by some estimates four times the money of the next largest recipient: the nuclear industry.

That prospect has many renewable-energy advocates and budget hawks pushing for more cuts even as conventional-energy experts warn of the fallout from the current round of proposed rollbacks.

"What the Democrats have cut is a big number," says Steve Ellis, a spokesman for Taxpayers for Common Sense, a Washington watchdog group. But "if you look at the whole universe of federal oil and gas breaks, it's a much larger number than this legislation cuts."

"If Congress imposes these additional costs on the companies, it just makes them more likely to look overseas," responds Mark Kibbe, senior tax-policy analyst for the American Petroleum Institute, a lobbying arm of the oil industry in Washington. "If you make these changes, you decrease US production, US jobs, and increase US reliance on imported oil."

Congress envisions slashing $14 billion – an average of $1.4 billion a year – over the next 10 years. This includes cutting $7.7 billion in tax incentives and toughening royalty-payment rules to bring in $6.3 billion that otherwise would flow to oil and gas companies.

The proposed cuts, when adjusted for inflation, would total per year roughly a third of the $3.6 billion in tax incentives the oil and gas industry got in 2005, the Government Accountability Office reported in September.

Left untouched would be one of the industry's most important federal tax breaks – the oil and gas percentage depletion allowance, created in 1916. Between 2006 and 2010 that break will cost taxpayers nearly $1 billion a year by allowing smaller, independent oil companies to deduct 15 percent of sales revenue to reflect the declining value of their investment, according to the Joint Committee on Taxation (JCT), which reports to Congress on the costs of federal tax legislation.

Another surviving tax break permits big oil companies to immediately deduct 70 percent of their "intangible drilling costs," such as the cost of wages, supplies, and site preparation. Smaller companies are permitted to deduct all of those costs. That break will be worth a little over $1 billion a year through 2010, the JCT found.

Industry officials deem such breaks as critical to US domestic oil production that they say would otherwise dwindle, since it costs far more to produce oil domestically than import it.

That claim is overblown, some analysts say. Even if such subsidies were triple their current level, they would have practically no effect on reducing oil prices and boost domestic production by only 0.2 percent, writes Gilbert Metcalf, a Tufts University economist in a recent study.