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US Senate tax bill retains oil sector breaks

10 Nov 2017 16:53 GMT
US Senate tax bill retains oil sector breaks

Washington, 10 November (Argus) — The oil and gas industry can declare an early victory in convincing Republican tax writers to leave their prized deductions mostly untouched in tax bills being considered in both chambers of the US Congress.

The US Senate yesterday unveiled its version of a tax overhaul that would spare all energy-specific tax deductions, although industry executives will be disappointed with the proposal's to delay a 15 percentage point reduction in corporate tax rates by a full year, until 2019.

But the Senate bill, unlike the House version, preserves tax credits for marginal wells and enhanced oil recovery that are worth about $200mn over the next decade. And both plans keep a far more lucrative deduction, a break for "intangible drilling costs" that is worth about $11bn over the same time period.

Oil and gas companies had looked at the prospects of the first overhaul to the tax code in 30 years with some trepidation, fearing an overall corporate rate drop would come at the expense of the breaks that industry officials say are critical inducements to domestic drilling. US oil and gas industry group the American Petroleum Institute spent $7.4mn on lobbying in the first three quarters of 2017, compared with $5.3mn over the same period in 2016, to help make its case on Capitol Hill that repealing the subsidies would jeopardize President Donald Trump's push for "energy dominance."

The Senate bill would still seek to permanently cut corporate tax rates to 20pc from 35pc, aligning with a tax package Republicans in the US House of Representatives moved out of committee yesterday. The Senate version would delay lower corporate rates by a year to keep the 10-year cost of the tax package below a $1.5 trillion cap.

Republicans leaders say their plan to cut business tax rates and repeal some deductions will reverse years of lackluster economic growth. And they are desperate to quickly pass some type of tax bill after the party has little to show since gaining unified control of the government nearly 10 months ago.

"It has been 30 years. America is ready for tax reform again, to get growing again," Senate majority leader Mitch McConnell (R-Kentucky) said yesterday.

The one-year delay to lower corporate rates in the Senate bill would limit the short-term benefits to industry and encourage companies to defer income into 2019. But President Donald Trump's insistence on deep rate cuts — he initially demanded a 15pc corporate rate — forced lawmakers to find ways to make tax cuts appear less costly. And the differences in the two bills will make it harder to combine them into a single package.

Oil and gas companies, and in particular refiners, will benefit from identical provisions in the Senate and House bills that would allow them to immediately deduct 100pc of the cost of investments for the next five years. The industry would see a drawback under the two competing bills by a plan to eliminate widely-used "section 199" manufacturing tax deduction worth about $11bn to the oil and gas sector over the next decade.

The two bills also seek to switch to a "territorial" tax system that would eliminate US taxes on foreign income, although the House bill includes a controversial measure to crack down on tax evasion by applying a 20pc excise tax to large transfers to companies' foreign affiliates. The oil and gas industry has been uncertain if the tax would apply to them but were supportive of changes the House made this week to soften its impact.

Potential trouble awaits the Senate tax bill because Republicans can only afford to lose two votes, assuming all Democrats oppose the measure. Senator Jeff Flake (R-Arizona) yesterday said he had concerns the bill would increase the "staggering national debt." Senator Bob Corker (R-Tennessee) has previously raised concerns about effects a $1.5 trillion tax cut would have on the deficit.

The US House Ways and Means Committee yesterday voted 24-16 in a party line vote to advance its own tax bill, after a four-day markup where Republicans made major changes to their bill. Among the changes adopted yesterday was an increase to one-time tax on cash companies hold overseas to 14pc from 12pc. The Senate bill also includes a one-time repatriation tax, but it uses a lower 10pc rate on cash.

The Ways and Means Committee yesterday voted 15-22 to block an amendment, from representative Earl Blumenauer (D-Oregon) that would keep the wind production tax credit at its inflation-adjusted value of 2.3¢/kWh. The House bill would lower the credit 35pc to its original value of 1.5¢/kWh. Wind industry officials said House Republicans were failing to honor a 2015 deal that extended the credit in exchange for lifting restrictions on crude exports.