Energy Policy and Tax Policy Are Inseparable

by King & Spalding
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In his 2014 State of the Union address, President Obama championed our nation's energy policy and the tremendous progress that has been made in the development and production of fossil fuels, especially natural gas. The president said, "The all-of-the-above energy strategy I announced a few years ago is working, and today, America is closer to energy independence than we've been in decades."

At the same time, President Obama once again stated his determination to end the tax incentives for the oil and gas industry. "Let's continue that progress with a smarter tax policy that stops giving $4 billion a year to fossil fuel industries that don't need it, so we can invest more in fuels of the future that do," he said. The president might achieve his goal of ending tax incentives for the oil and gas industry, but he will do so at the expense of sound energy policy.

The nation's energy policy is inextricably tied to the nation's tax code. Tax laws are central to the development of domestic energy resources. The tax code may not be the best way to design a strategically sustainable energy policy, but for the past century, it has been the most important. In the coming months, as the congressional debate over tax reform intensifies, the nation's energy policy should be central to that debate.

The president is right to champion the progress that has been made by the oil and gas industry during his presidency. Within the past two years, the potential supply of natural gas in the United States has increased by 26 percent. Almost half of the country's natural-gas production has occurred within the past four years. This is a phenomenal achievement. New technologies and advancements in horizontal drilling and hydraulic fracturing have enabled the oil and gas industry to find and recover enormous reserves of natural gas. As a result, the United States now has a 100-year supply. In the near future, by making the right choices, America could become energy independent.

The tax code is in great need of reform. America's corporate tax rate is the highest in the world, and Americans deplore the complexity and inconsistencies in the tax code. While comprehensive tax reform may not be possible in the highly partisan environment of this Congress, the potential passage of an incremental tax bill is significant. The upcoming debate over fossil fuel taxes will not only be about policy. Members of Congress will be looking for additional revenues, and the oil and gas industry is a ripe target.

In the context of fundamental tax reform, special tax breaks for every industry should be scrutinized. Nonetheless, there are tax breaks that should be preserved and have been fundamental to creating new technologies and have been the driving force behind some of the great advances in medicine, scientific research, technology, and oil and gas exploration. For example, the tax code gives all industries a tax break tied to research-and-development ("R&D") costs. For the technology industry, especially for new high-risk ventures, the R&D tax break has been essential. Without it, American companies would be at a great disadvantage as they compete with foreign competitors. No one suggests that in the name of simplifying the tax code or raising additional revenues, this tax break should be eliminated.

On a policy level, there is no difference between the R&D tax break and a tax break tied to
intangible drilling costs ("IDC") that benefits oil and gas companies. The purpose of the IDC tax break is to encourage oil and natural-gas production, which is a risky endeavor even under the best of circumstances. This has been especially true for small independent oil and gas producers. The IDC tax break has encouraged the necessary risk-taking that has been critical to the historic progress of which Obama is rightfully proud.

The IDC tax break has been in the tax law for 100 years, and it has been fundamental to the success of oil and gas exploration in America. The Obama administration wants to eliminate it. To sweep it away could profoundly impede the president's goal of energy independence. It is not sound energy policy or wise tax policy.

In the coming months, the debate over taxes and our nation's energy policy will intensify. They are inseparable. Decisions made about one will dramatically affect the other. There is much at stake.

Michael A. Andrews
Washington D.C.
+1 202 626 5609

mandrews@kslaw.com
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Abraham N.M. Shashy, Jr.
Washington D.C.
+1 202 626 5614
hshashy@kslaw.com
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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