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The president’s fiscal year 2010 budget repeals several long-standing oil and gas subsidies, saving an estimated $31.7 billion over the next ten years. In addition, general tax and subsidy reforms will save $108.5 billion, largely from subsidies that benefit the oil and gas industries. For nearly a century, taxpayers have provided billions of dollars in subsidies to the oil and gas industry, this proposal takes the first step toward reining in decades of giveaways.

Details of the Proposed Oil and Gas Cuts

The president budget proposal repeals the Manufacturing Tax Deduction, Percentage Depletion Allowance, Expensing of Intangible Drilling Costs, Preferential Time Period Treatment for Geological and Geophysical Amortization, Passive Loss Exemption, and Deduction for Tertiary Injectants.

In addition, the budget removes the Enhanced Oil Recovery and Marginal Well tax credits, cuts oil research and development funding, reforms abuses of the Foreign Tax Credit (FTC) and prohibits Last-In First-Out (LIFO) inventory accounting. Finally, the budget includes plans to impose an excise tax on offshore drilling.

The largest taxpayer savings will result from the repeal of the Manufacturing Tax Deduction, enacted under the American Jobs Creation Act of 2004. This tax loophole essentially allows oil and gas producers to deduct 6% of their taxable income from qualified activities in the United States. If this subsidy is repealed, savings over the next ten years will total $13.29 billion. The president‘s budget proposes this reform be applied to all industries in the U.S., not just the oil and gas industries.

Last-in, first-out (LIFO) accounting methods are also repealed for all industries in the budget request. Because of inflation and general rising costs, LIFO allows companies to move the most expensive inventory off of their balance sheets, and thereby reduce their taxable income, even though the actual movement of inventory occurs on a first-in, first-out (FIFO) basis in most industries. LIFO is already prohibited by International Financial Reporting Standards. The repeal of LIFO applies to all industries, including oil and gas, and will create savings of $61 billion over the next ten years.

Drilling Down on Oil and Gas Subsidies

We are pleased to see the Administration taking a strong stance against subsidies to the oil and gas industries. As stated in the budget request “The oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices…Oil and, to a large extent, gas are internationally traded commodities and their prices are determined on the world market. As a result, domestic oil and gas production subsidies generally do not significantly reduce the prices that consumers pay for products such as gasoline or home heating oil, resulting primarily in higher returns to the industry.”

We applaud the Administration for proposing the repeal of the above loopholes, tax breaks and subsidies. However, more must be done to end the billions in other wasteful subsidies to the fossil fuel industry as well as other mature energy industries. The Administration is taking the first steps in ending the long-standing flow of U.S. taxpayer dollars to an industry that does not need handouts. Taxpayers for Common Sense supports the removal of these subsidies and urges Congress and the Administration to take action to repeal other existing subsidies to the fossil fuel industry.

For more information, please contact Autumn Hanna at (202) 546-8500 x112 or autumn[at]taxpayer.net