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US Senate Stalls Cut To Oil Industry Tax Breaks

May 2011 - Tax & Private Client. Legal Developments by Hassans.

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The United States Senate has rejected a bill which would have cancelled the USD21bn in tax breaks that the country?s oil and gas industry is expected to receive over the next ten years, and dedicated the increased revenue generated to the reduction of the federal budget deficit.

Sponsored by Democrat Robert Menendez, the Close Big Oil Tax Loopholes Act would have amended the tax code to deny to oil companies, with gross receipts in excess of USD1bn in any tax year and an average daily worldwide production of crude oil of at least 500,000 barrels a year, any applicable foreign tax credits; tax deductions for intangible drilling and development costs; the percentage depletion allowance for oil and gas wells; and royalty relief for natural gas production from deep wells.

In the event, although the bill achieved a majority vote by 52 to 42, it failed to achieve the 60 votes it needed to advance, the Senate largely divided on party lines. The Republicans continued their opposition to the bill, while the Democrats continued to profess that the largest oil companies could afford to give up their tax benefits.

There has been much discussion recently over the oil industry?s tax breaks, both with regard to current high oil prices being suffered by consumers and policies available to reduce the government?s fiscal deficit. Earlier this month, President Obama had repeated his call for an elimination of the ?taxpayer subsidies we give to oil and gas companies?.

?In the last few months,? he said, ?the biggest oil companies made about USD4bn in profits each week. And yet, they get USD4bn in taxpayer subsidies each year. USD4bn at a time when we?re trying to reduce our deficit. This isn?t fair, it makes no sense.?

However, leading Republican politicians have continued to insist that a policy of eliminating those tax incentives could cause the US to become more dependent on imported oil, as the comparable cost of domestic oil production was increased and the oil industry was encouraged to move production overseas.

In addition, as the tax incentives in question are available for all US manufacturers, it is questioned whether one industry should be singled out and treated differently. It is suggested that a discussion of those incentives, and others within the US corporate tax system, should be held within the on-going debate on overall tax reform.

Continuing that line of opinion, the US Chamber of Commerce Executive Vice President for Government Affairs, Bruce Josten, after the vote, said: ?Raising taxes on oil companies would end up ultimately hitting consumers? wallets, and the Senate was right to reject this bill. Levying punitive new taxes and fees on America?s oil and gas industry would increase US dependence on foreign oil, increase costs to consumers, jeopardize US jobs, and erode economic competitiveness.?

?Instead of targeting specific industries to offset or pay for Congress?s inability to affect sound fiscal policy,? he added, ?Congress should be focusing on solutions that will lead to a more secure energy future. This includes increasing domestic energy production.?

After the vote, the Senate Majority Leader, Democrat Harry Reid, confirmed that he would be looking to revive the issue in future talks on US tax reform, while the President?s Press Secretary considered that ?the vote - with support from over half the US Senate - is an important step towards repealing these unwarranted subsidies for the oil and gas industry. The Administration will continue to pursue this important reform.?

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