	Background

In an Earth Day speech, President Obama linked the importance of winning the technological race to develop clean energy sources with the economic problems associated with U.S. dependence on oil. Many of these proposals represent the elimination of tax expenditures. In some cases, for example, the expensing of intangible drilling expenses, the major oil companies have been excluded from the benefits of the tax provision while the benefit was still in effect for the independent oil producers. These three proposals are likely to increase total taxes on the oil industry: an excise tax on Gulf of Mexico oil and natural gas production, the rescinding of the manufacturing tax deduction for the oil industry, and the repeal of percentage depletion. Repeal of the deduction or less favorable tax treatment of the expenses would be likely to reduce output if the profit margin on oil were low. Repeal Passive Loss Exception for Working Interests in Oil Properties

Repeal of the passive loss exception for working interests in oil and natural gas properties is a relatively small item in terms of revenue contribution—$19 million from 2010 to 2014. The extended amortization period for independent producers is projected by the Administration to contribute almost $1.2 billion in deficit reduction over the period 2010 to 2019. These same proposals, from an alternate point of view, can also be considered to be the elimination of tax preferences that have favored the oil and natural gas industries over other energy sources, and made oil and gas products artificially inexpensive, with consumer costs held below true cost of consumption, when the costs associated with climate change and energy dependence, among other effects, are included.
President Obama, in an Earth Day speech, addressed the linkage between the problems he associated with U.S. reliance on imported oil and the importance of a future based more on alternative energy sources. These problems could be partially addressed by reducing what the Administration sees as favorable treatment of the oil and natural gas industries that were designed to increase production of petroleum products.
The FY2010 budget proposal outlined a set of proposals, framed in terms of deficit reduction, or the elimination of tax expenditures, that would potentially increase the taxes of the oil and natural gas industries, especially the independent producers. These proposals included an excise tax on Gulf of Mexico oil and natural gas production to limit previously granted royalty relief, repeal of the enhanced oil recovery and marginal well tax credits, repeal of the expensing of intangible drilling costs and the deduction for tertiary injectants, repeal of passive loss exceptions for working interests in oil and natural gas properties, and the manufacturing tax deduction for oil and natural gas companies, and the increasing amortization periods for certain expenses and the repeal of the percentage depletion allowance for independent oil and natural gas producers.
It was estimated that these changes would provide $12.7 billion categorized by the Administration as deficit reduction over the period 2010 to 2014. The changes, if enacted, also would reduce the tax advantage enjoyed by independent oil and natural gas producers over the major integrated oil companies. On what will likely be a small scale, the proposals also will make oil and natural gas more expensive for U.S. consumers, with the effect of reducing consumption of those fuels.