US Senate minimum tax threatens energy deductions

Republicans in the US Senate might undercut deductions worth billions of dollars to oil, gas and coal companies by retaining an "alternative minimum tax" in a tax bill they passed last week.

Republicans voted 51-49 to approve the bill on 2 December, just hours after unveiling changes projected to raise $320bn in revenue and provide nearly $350bn in tax cuts. The bill would cut corporate tax rates to 20pc from 35pc, open the Arctic National Wildlife Refuge in Alaska to drilling and make other changes across the tax code.

But among the last-minute changes Republicans endorsed was the reinstatement of the 20pc corporate alternative minimum tax. Businesses say because they could not pay less than the alternative minimum rate, they would lose the benefit of taking deductions that reduce the amount of income subject to the standard corporate tax rate.

"This legislation is much worse than the status quo," US coal producer Murray Energy chief executive Robert Murray said. "This is a mockery of tax reform, which will irreparably harm coal miners and companies."

Oil and gas groups are reviewing how the change will affect industry-specific deductions, such as the ability to immediately write off "intangible" drilling costs, that are collectively worth about $4.5bn/yr. Independent Petroleum Association of America executive vice president Lee Fuller said the trade group is following the issue closely because of its potential effect on deductions.

The change on its face appears "highly problematic" and threatens to erode the value of many business deductions, Bracewell energy attorney Liam Donovan said. US independent producers seem to have less exposure to the change than integrated oil companies because of exemptions they won through previous tax bills, he said.

Business and conservative groups were critical of Republican's decision to bring back the minimum tax. The reinstatement of the tax is a "very unpleasant surprise" that would eviscerate tax credits for businesses that invest in research and development, business group the US Chamber of Commerce's vice president of tax policy Caroline Harris said.

Critics want the minimum tax eliminated once the Senate tax bill is reconciled with a separate bill the US House of Representatives passed on 16 November. Energy groups say they expect the alternative minimum tax would be changed in the conference process, although that would force Republicans to find $40bn in new revenue over the next decade.

Senate Republicans made other last-minute changes to their bill affecting the energy sector. The bill includes a change for publicly-traded partnerships that would "fix what would have been a disincentive" for master limited partnerships commonly used by oil and gas pipelines, an industry official.

The bill would also sell 7mn bl of crude from the US Strategic Petroleum Reserve, up from 5mn bl previously. The sales will pay for $300mn in offshore oil revenue to US Gulf coast states and provide another $300mn to hit a goal of raising $1bn in energy-related revenue.