Those in favor say the incentives have benefited a sector critical to the U.S. economy; those opposed say that by playing favorites, the deductions shift the tax burden to others

U.S. oil-and-gas companies receive billions of dollars in federal tax incentives annually linked to activities such as tapping new wells.

Do these incentives benefit consumers, or are they simply gifts that unfairly favor the fossil-fuel industry?

The White House clearly is in the camp that wants the tax breaks reduced.

Not only has President Barack Obama repeatedly called for a repeal of much of the oil-and-gas industry’s favorable tax treatment, his budget proposal for fiscal 2017 included a new $10-a-barrel fee on oil to help fund low-carbon infrastructure projects.

Those calling for an end to the breaks say oil-and-gas firms have made huge profits over the years and have more than enough incentive to continue doing business. They say Washington needs to end special carve-outs to overhaul the corporate tax code.

Industry supporters see it differently. They say tax incentives have fueled investments in unconventional production, which has led to abundant supplies of oil and gas and lower prices for consumers. They believe the debate isn’t really about taxes, but rather about climate-change crusaders wanting to punish the fossil-fuel industry.

Mark J. Perry, a scholar at the American Enterprise Institute and a professor of economics in the School of Management at the University of Michigan-Flint, makes the case for keeping the industry’s favorable tax treatment. Arguing against him is Ryan Alexander, president of Taxpayers for Common Sense, an advocacy group that monitors government spending.

YES: The Breaks Have Benefited a Sector Critical to the U.S. Economy

By Mark J. Perry

The call to eliminate tax deductions for the oil and natural-gas industry is no less absurd today than it was in 2013, the last time the issue was a headline-maker.

These incentives have encouraged domestic investment in energy production and enabled U.S. companies to compete with overseas rivals, allowing the American petroleum industry to flourish.

But the tax breaks haven’t just been good for oil-and-gas firms; they’ve also led to billions of dollars in savings for American consumers and businesses from lower energy costs. Have no illusions about it: Tax incentives are essential for unconventional oil-and-gas production, and there would have been no shale revolution without them.

Incentives such as the intangible drilling deduction and the special percentage depletion allowance encouraged energy firms to invest hundreds of billions of dollars in the advanced technologies needed to tap shale formations richly endowed with oil and natural gas. Tax breaks also enabled producers to unlock sizable deposits of oil and gas in ultradeep waters. Together, these investments have put the U.S. on the path to becoming energy independent, a hopeless quest only 15 years ago.

Oil powers more than 90% of the transportation sector, while natural gas heats almost half of our homes, powers much of the manufacturing sector and now generates the largest share of our electricity. Considering oil and gas are indispensable to our economy, we should be looking for ways to encourage more production, not looking for ways to punish producers.

The truth is, the fight over the industry’s tax deductions isn’t really a fight about taxes. Rather it’s a debate about the importance and future of fossil-fuel production in the U.S.

For climate crusaders who view oil and gas as a problem instead of the lifeblood of our economy, rejiggering the tax code is seen as a catalyst for restructuring the energy economy. They began their assault on oil-and-gas producers under the guise of punishing the industry for “windfall profits.” In 2013, critics called for eliminating industry tax credits and deductions, maintaining that $100-a-barrel oil was here to stay. It was inconceivable that the industry could ever again face lean times.

But oil prices did fall. In fact, they crashed. Two years of low energy prices have wreaked havoc on the industry. U.S. independent producers—which lean the most heavily on the tax deductions and credits—have been hit hardest.

Since 2015, more than 100 oil-and-gas producers have filed for bankruptcy. More than 1,000 drilling rigs have been idled in recent years, and more than 100,000 American workers let go. Profits for major firms in the industry have suffered. In the second quarter of this year, Exxon Mobil Corp. reported its smallest profit for any quarter since 1999 andChevron Corp. and ConocoPhillips each had a loss of more than $2 billion in the first half of this year. Not surprisingly, criticism over industry profits has vanished as quickly as the peak-oil theory. The underlying cause of the debate is now fully in the open.

The anti-fossil-fuel crowd is either dangerously ignorant of the importance of fossil fuels to the U.S. economy, or so blinded by its climate crusade it doesn’t care that the attempt to put oil-and-gas producers at a disadvantage is essentially an attack on Americans’ standard of living.

Thanks to an abundance of domestic oil and gas, the amount U.S. consumers spend on energy has fallen below 4% of total consumer expenditures this year for the first time in history, according to the U.S. Bureau of Economic Analysis. In dollar terms, lower energy costs over just the past few years have translated into hundreds of billions of dollars in savings for American households, dwarfing any taxpayer savings that could be achieved by repealing oil-and-gas tax breaks.

Tax reform might be fair if legitimate tax-deductible expenses were to be eliminated across the board for all industries that currently take them—including farmers, auto makers, food producers, drug companies and software firms—and if that were to be accompanied by reductions in the corporate tax rates that applied to a broader tax base.

But singling out the elimination of legitimate tax-deductible production expenses for one of America’s most essential industries—an industry critical to job creation, affordable energy and even our nation’s national security—is the kind of misguided thinking we can’t afford.

Dr. Perry is a scholar at the American Enterprise Institute and a professor of economics in the School of Management at the University of Michigan-Flint. He can be reached at reports@wsj.com.

NO: By Playing Favorites, They Shift the Tax Burden to Others

By Ryan Alexander

The tax breaks that Congress provides on income derived from or devoted to certain activities are designed to encourage that specific activity. But what they end up doing is distorting economic decision making and rewarding activity that would occur even without the special treatment.

The oil-and-gas industry is a perfect example. It has enjoyed special tax preferences since the start of the modern income tax in the early 20th century. Yet despite the cyclical nature of oil-and-gas markets, the industry has made huge profits over the years and proved that demand for its products is more than enough incentive to continue doing business.

We don’t need—and can’t afford—to continue to provide these incentives to this industry. Like all tax breaks, oil and gas exclusions are costly to the U.S. Treasury and shift the tax burden to others, either through higher current tax rates or borrowing that will increase taxes on future generations.

Let’s focus on two of the largest oil and gas tax breaks—the intangible drilling-costs deduction and the special percentage depletion allowance—and how they exemplify the kind of special carve-outs Congress needs to eliminate if it is to reform the corporate tax code. These special breaks offer producers significantly more generous capital cost write-offs than those available to other U.S. taxpayers.

The intangible drilling costs deduction allows qualified oil-and-gas companies to immediately deduct all costs for designing and fabricating drilling platforms, including “wages, fuel, repairs, hauling and supplies related to drilling wells and preparing them for production.” Companies in other industries that construct plants, equipment or other productive assets generally must capitalize all of the associated costs over time, typically based on the asset’s useful life. By targeting subsidies to oil and gas, tax rules like this disadvantage other businesses that make equally important contributions to our economy. The Joint Committee on Taxationestimates that repealing it would save taxpayers $13 billion over 10 years.

Then there’s the special percentage depletion allowance, which allows some oil-and-gas companies to deduct more than they invest in an asset, the very definition of a tax shelter. Natural-resource developers can claim a depletion deduction for the costs of acquiring a proportion of a resource as it is depleted. The special allowance gives independent producers a flat deduction of 15% of their gross income from the first 1,000 barrels-a-day of production. Although the deduction is generally limited to the value of a property’s production, nothing prevents a producer from deducting more than its investment in the property. As a result, oil-and-gas producers or royalty owners may pay zero tax on their income on certain properties. Owners of marginal wells are provided with even more generous rules. Repealing this allowance would save taxpayers more than $12 billion over 10 years, the Joint Committee on Taxation estimates.

Industry supporters may say tax breaks and deductions are what spurred unconventional forms of oil-and-gas production that led to lower energy prices for American consumers.

I would say market forces—including $100-a-barrel oil and technological advances—were the main drivers of the hydraulic-fracturing production boom that brought us shale oil, not broad undisciplined tax subsidies. What’s more, the industry’s tax deductions don’t just go to companies that take risks. They are available regardless of whether a well is being developed with proven technology, drilled in proven formations or would be highly profitable without the favorable tax treatment.

Would energy prices increase for most Americans if the tax breaks were eliminated? It’s unlikely—even if the repeal caused some marginally economic properties in the U.S. to go unexploited. World supply and demand determine oil and gas prices, and what we have seen in the current drop of oil prices is that Saudi Arabia effectively determines the price of oil—even in the U.S.

The oil-and-gas industry likes to say it’s being unfairly singled out when its tax subsidies are cited as examples of our broken tax system, or that anti-fossil-fuel groups are trying to punish it to advance clean energy. Taxpayers for Common Sense sees it differently.

We believe Congress effectively is picking fossil-fuel investments as the winners, while leaving other investments as relative losers. Eliminating the industry’s special deductions and breaks would help Congress broaden the tax base and lower the overall corporate tax rate, a widely supported goal of tax reform.

Ms. Alexander is president of Taxpayers for Common Sense, an advocacy group that monitors government spending. She can be reached at reports@wsj.com.