American Oil and Gas Reporter - November 2017 - 26

Federal Tax Reform

Framework Leaves Several Questions
WASHINGTON-The White House and
Republican leaders in Congress released
their outline for comprehensive income tax
reform in late September, but several weeks
later, how much tax reform might help or
hurt the independent oil and gas industry
still was somewhat of a black box.
The United Framework for Fixing our
Broken Tax Code, which was released
Sept. 27, calls for:
* A corporate tax rate of 20 percent;
* Limiting the maximum rate applied
to the business income of pass-through
entities (sole proprietorships, partnerships
and S-corporations) to 25 percent;
* Repeal of the Alternative Minimum
Tax for both individuals and corporations;
* Repeal of the estate and generation-skipping transfer taxes;
* Full expensing of investments in
depreciable assets other than structures
for at least five years;
* Limiting deductions for net interest
expenses incurred by C-corps.; and
* A one-time repatriation tax on corporate earnings held overseas at different
rates for liquid and illiquid assets, along
with a territorial system of corporate taxation with a minimum tax rate aimed at
discouraging companies from shifting
profits to overseas tax havens.
For individuals, the framework envisions reducing the current seven tax brackets to three brackets of 12, 25 and 35
percent. It would "roughly double" the
standard filing deduction to $24,000 for
married filers and $12,000 for single
filers, but would eliminate personal exemptions along with most itemized deductions, including state and local taxes,
but leave deductions for home mortgages
and charitable contributions. The plan
also would increase the Child Tax Credit
and raise the income threshold at which
the credit begins to phase out.
Mixed Bag
Initial responses by oil and gas industry
spokesmen were generally positive. National Ocean Industries Association President Randall Luthi calls the tax reform
framework "another breath of fresh air
for U.S. businesses and workers."
American Petroleum Institute President
and Chief Executive Officer Jack Gerard
says, "Our industry supports pro-growth
tax reform, and leaders in Congress and
the administration demonstrated their commitment to achieving this shared goal."
Independent Petroleum Association of
26 THE AMERICAN OIL & GAS REPORTER

America President and CEO Barry Russell
says "there are several positive elements"
for oil and gas producers, citing the lower
corporate and individual tax rates, repealing the AMT, eliminating the estate
tax and full expensing of capital investments, although only for five years.
Russell also points out that the framework calls for eliminating the Section
199 manufacturers tax credit, which includes crude oil and natural gas. The
framework does suggest preserving the
research and development tax credit.
But as to key industry tax treatments
such as percentage depletion and intangible
drilling costs, the document merely states,
"While the framework envisions repeal
of other business credits, the (congressional
tax-writing) committees may decide to
retain some . . . to the extent budgetary
limitations allow."
By and large, those committees aren't
talking, advises IPAA Executive Vice President Lee Fuller. "People listen, but nobody
really reveals very much," he says.
A lot of that reticence to talk, Fuller
explains, is associated with the accelerated
schedule under which Republicans hope
to push their tax reform plan through
Congress. At least one timetable calls for
House Ways and Means Committee
markup by Nov. 10, followed by House
floor action along with Senate Finance
Committee markup by Nov. 23. A Senate
floor vote would follow by Dec. 9 and a
conference committee would work out
differences by Dec. 23, under the schedule,
with final action on the bill by Dec. 31.
By comparison, Fuller recalls, the Tax
Reform Act of 1986 consumed much of
lawmakers' attention from the beginning
of that year until final passage in September. "And it was built on work that
had been done during the prior two congresses," he remembers.
If lawmakers are going to push through
tax reform legislation this time in only
three months, Fuller reasons, "They want
to make sure they have prenegotiated as
much as they can on key issues before
they release anything, because whatever
they put out is going to be challenged."
One key vote, Fuller notes, was Senate
passage on Oct. 19 of its 2018 budget
resolution, which will allow the deficit
to grow by $1.5 trillion over the next
decade, thereby leaving some room for a
less than revenue-neutral tax bill.
Contained in that budget resolution,
published reports mention, are instructions
for the Energy and Natural Resources

Committee to develop policies that will
generate at least $1 billion over the next
decade, which the reports anticipate will
come from allowing drilling in the Arctic
National Wildlife Refuge.
Making Industry's Point
During October, Fuller says, IPAA
was working very hard to convince the
tax-writing committees that IDCs, percentage depletion and the passive loss
exclusion ought to remain in the federal
tax code.
Regarding the latter, he comments that
if one of the goals of reform is a simpler
tax code, eliminating the distinction between
passive and active income might make
sense, although "that could be an issue."
Although intangible drilling costs-as
well as tangible drilling costs, Fuller
points out-would be deductible under
the tax reform framework's full investment
expensing, it is only for five years. "We
don't want them to wrap the permanent
IDC provision into the five-year expensing
and then have it not continue after those
five years," he says.
IPAA's argument, Fuller reveals, is that
since one of the stated goals of tax reform
is to encourage investment by moving
everyone toward full expensing, "you
shouldn't take it away from those parts of
the tax code where it exists already."
For percentage depletion, Fuller continues, "The challenge is to keep it from
becoming a (revenue-raising) target. There
we are working very closely with the rest
of the extraction industry community because
that is the biggest deduction for mining. It
is, in essence, their number one issue."
The goal, he says, is to establish percentage depletion as a concept linked to
capital recovery, so that the debate moves
past whether percentage depletion ought
to be part of the tax code and onto the individual details.
"The administration, and the Senate
and House, have gotten extremely focused
on tax rates," Fuller observes. "We have
made the point that for this industry,
capital recovery is far more important.
"If this administration, and some in
Congress, view energy production as a
valuable part of the economy, and even a
valuable part of our international position,
it makes no sense to have tax reform that
has the effect of raising taxes on energy
development. It is completely inconsistent
with their own objectives," Fuller outlines.
"We will continue to make that point
throughout this debate."
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American Oil and Gas Reporter - November 2017

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