	Background

The Obama Administration, in the FY2012 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. The repeal of the expensing of intangible drilling expenses, the repeal of percentage depletion, and the repeal of the manufacturing tax deduction for the oil industry would increase the industry's estimated tax payments by $41.9 billion through 2021. 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, $117 million from 2012 to 2016. As shown in Table 1 , the Administration estimates that the repeal of this deduction for the oil and natural gas industries would contribute $7.7 billion in revenue for the period 2012 to 2016. Increase Geological and Geophysical Amortization Period

Geological and geophysical expenses are incurred during the process of oil and natural gas resource development. 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 a percent of the revenues, profits, or other taxes and fees paid to the government.
The Obama Administration, in the FY2012 budget proposal, seeks to eliminate certain 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 provisions as subsidies for a profitable industry the government can ill afford, and impediments to the development of clean energy alternatives.
The FY2012 budget proposal outlines a set of proposals, framed in terms of deficit reduction, or termination of tax preferences, that would potentially increase the taxes on 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, 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 generate more revenue for the Department of the Interior are included in the budget proposal.
The Administration estimates that the tax changes outlined in the budget proposal would provide $22.8 billion in revenues over the period 2012 to 2016, and over $43.6 billion from 2012 to 2021. These changes, if enacted by Congress, also would reduce the tax advantage enjoyed by independent oil and natural gas companies over the major oil companies. On what would likely be a small scale, the proposals also would make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence.
This report will be updated as events warrant.