President Obama’s FY 2015 budget includes a $100 billion tax increase on energy companies with the majority of the pain falling on oil and natural gas producers. Obama’s tax increases will make it harder for energy companies to recover their investments, which will make it harder for oil and natural gas companies to redeploy their capital, which will hamstring economic growth and kill jobs.
In sum, do you want capital tied up in long depreciation/amortization schedules or funding new projects and creating new jobs? President Obama and most Democrats choose the former. This cutting off your nose to spite your face mentality is perfectly illustrated by a graph in a new Chamber of Commerce report:
The graph shows that oil and natural gas jobs have increased by 40 percent since the beginning of the recession compared to a minor decline in non-farm job growth. Objectively, raising taxes on the industry buoying the American economy is bad policy. This huge upswing has not only resulted in economic growth in the oil and natural gas sector but has also reduced energy prices for consumers by depressing natural gas prices. Development of shale natural gas has brought home manufacturing jobs and revitalized America’s chemical industry. You would think the Democratic Party would recognize a good thing when they saw it?
To further illustrate the economic impact resulting from lengthening cost recovery periods, look no further than the Obama proposed Intangible Drilling Costs (IDC) repeal. IDCs include things like wages, fuel, repairs and other non-salvageable expenses necessary to get oil and natural gas out of the ground. A Wood Mackenzie study showed that delaying the deductibility of IDC expenses would have numerous negative economic effects and begin to pull down the blue line in the above graph.
According to Wood Mackenzie, the Obama IDC proposal would specifically:
Investment & Jobs
- Cause investment through the drilling and development of oil and gas resources to decline by $407 billion over the period 2014 to 2023
- This is driven by a reduction in drilling by an average of 8,000 wells and over 400 rigs per year
- The impact on employment is to lose an average of 225,000 jobs per year of which an estimated 65,000 would be direct oil and gas industry jobs
- By 2023 we expect the IDC delay case production to be 3.8 mmboed (or 14%) lower than the current case.
The appropriate tax treatment for all capital investments is immediate, full deductibility in the year the expense occurred. Why should a business that buys a computer be allowed to deduct that purchase in five years while a business that buys a chair has to wait seven years to fully deduct their costs?
Instead of taxing oil and natural gas companies to fund an additional $791 billion in government spending over the next 10 years, President Obama and the Democratic Party should stay out of the way and let the oil and natural gas industry create jobs and impel economic growth.
Source: Forbes Business