	Background

The Obama Administration, in the FY2014 budget proposal, has proposed eliminating a variety of federal tax deductions and credits available to the oil and natural gas industries. Many of these proposed tax changes have the effect of equalizing the tax treatment of independent oil producers to that of the major oil companies. In the current law, the full expensing of intangible drilling costs is available to independent oil producers. 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 tax revenues, estimated at $74 million from FY2014 to FY2023. The Administration projects that the repeal of the percentage depletion allowance would yield tax revenues of approximately $10.7 billion over the period FY2014 through FY2023. Repeal Manufacturing Tax Deduction (§199)

A provision in the proposed budget for FY2014 that affects both independent and the major companies' oil and natural gas tax liability is the repeal of the domestic manufacturing tax deduction for those industries. Increase Geological and Geophysical Amortization Period

Geological and geophysical expenses are incurred during the process of oil and natural gas resource development. Using FY2014 Budget Proposal estimates, changing the LIFO provision for all industries could raise $80.8 billion over the period FY2014 to FY2023, with the API estimating that $28.3 billion of the total over the period would come from the oil and natural gas industries. Department of the Interior Budget

The Department of the Interior (DOI) budget proposal contains several changes in fees and other revenue-generating items that would affect the oil and natural gas industries. Although these fees and charges would increase the cost of exploring, developing, and operating oil and natural gas facilities under DOI's management, and are likely to reduce those activities as suggested by opponents of the proposals, the effects are likely to be small, as these fees represent only a fraction of the revenues, profits, or other taxes and fees paid to the government.
The Obama Administration, in the FY2014 budget proposal, seeks to eliminate a set of tax expenditures that benefit the oil and natural gas industries. Supporters of these tax provisions see them as comparable to those affecting other industries and supporting the production of domestic oil and natural gas resources. Opponents of the provisions see these tax expenditures as subsidies to a profitable industry the government can ill afford, and impediments to the development of clean energy alternatives.
The FY2014 budget proposal outlines a set of proposals, framed as the termination of tax preferences, that would potentially increase the taxes paid by the oil and natural gas industries, especially those of the independent producers. These proposals include repeal of the enhanced oil recovery and marginal well tax credits, repeal of the current expensing of intangible drilling costs provision, repeal of the deduction for tertiary injectants, repeal of the passive loss exception for working interests in oil and natural gas properties, elimination of the manufacturing tax deduction for oil and natural gas companies, increasing the amortization period for certain exploration expenses, and repeal of the percentage depletion allowance for independent oil and natural gas producers. In addition, a variety of increased inspection fees and other charges that would generate more revenue for the Department of the Interior (DOI) are included in the budget proposal.
The Administration estimates that the tax changes outlined in the budget proposal would provide $24.2 billion in additional revenues over the period FY2014 through FY2018, and $40.7 billion from FY2014 to FY2023. These changes, if enacted by Congress, would reduce the tax advantage of independent oil and natural gas companies over the major oil companies. They would also likely raise the cost of exploration and production, with the possible result of higher consumer prices and more slowly increasing domestic production; however, the measurement of these effects is beyond the scope of this report.