President Biden’s budget for fiscal year 2023 is a $5.8 trillion. It contains large amounts of climate spending and anti-oil and gas policies that did not get passed in his Build Back Better bill last year. Biden is seeking $50 billion for programs to address climate change, including $18 billion to build the U.S. government’s resilience to climate change, $3.3 billion in funding for clean energy projects and at least $20 million for a new “Civilian Climate Corps.” To help pay for the increased climate spending, Biden is asking Congress to eliminate tax credits that aid the oil and gas industry, including tax deductions for intangible drilling costs and low-production wells that enable small producers in the United States to produce oil. Removing these deductions will lower domestic output while further raising already high oil and gasoline prices.
Biden is also asking Congress to provide other nations with $11 billion in taxpayer dollars to fight climate change—more than 10 times the amount lawmakers spent in fiscal 2022. Biden earlier vowed to contribute about $11.4 billion by 2024, and is probably asking for it a year in advance in case the Democrats lose control of Congress in the November midterm elections. The proposed spending includes direct funding as well as loan guarantees and other financial resources. Biden’s budget plan would support a $3.2 billion loan to the Clean Technology Fund and $1.6 billion for the United Nations Green Climate Fund.
So far, Congress has not funded President Obama’s 2015 commitment to provide $3 billion for the Green Climate Fund by 2020. Former President Barack Obama delivered two down payments of $500 million each to the fund, while former President Donald Trump halted the spending entirely. And, in the just-enacted fiscal 2022 budget, Congressional lawmakers did not include a specific line item for the Green Climate Fund. Congress fell well short of the mark when it passed the final fiscal 2022 budget, which had $1.5 billion less than Biden’s initial requested spending of $2.5 billion. The $1 billion total only had $387 million more international climate spending than during the Trump administration.
Removal of Oil and Gas Tax Deductions
Oil and gas tax deductions totaling $43.6 billion over a decade would end if Congress approves Biden’s Proposed Budget for fiscal 2023. Among them is a deduction of intangible drilling costs, which allows oil and gas companies to deduct certain business expenses, such as site preparation and repairs. A deduction for oil and gas production from marginal wells and a percentage depletion deduction that mineral rights owners can claim for a portion of the value of the oil and gas reserves removed from their property would also end.
These tax deductions are mainly targeted to small independent oil and natural gas producers, rather than the major integrated oil companies usually described as “big oil.” One of the tax deductions is provided to all U.S. manufacturing firms, not just oil and gas producers, while the others are for typical business deductions in the tax code akin to research and development costs available to all industries.
The two tax deductions that primarily affect small independent producers are the percentage depletion allowance and expensing of intangible drilling costs. As the oil and gas in a well is depleted, independent producers are allowed a percentage depletion allowance to be deducted from their taxes. While the percentage depletion allowance sounds complicated, it is similar to the treatment given other businesses for depreciation of an asset. The tax code essentially treats the value of a well as it does the value of a newly constructed factory, allowing a percentage of the value to be depreciated each year. This allowance was first instituted in 1926 to compensate for the decreasing value of the resource, and was eliminated for major oil companies in 1975. This tax deduction is estimated to save the independent oil and gas producers about $0.6 billion in fiscal year 2021.
Independent producers are also allowed to count certain costs associated with the drilling and development of wells as business expenses. The law allows the small producers to expense the full value of these costs, known as intangible drilling costs, every year to encourage them to explore for new oil. The major companies get a portion of this deduction—they can expense a third of intangible drilling costs, but they must spread the deductions across a five-year period. This tax treatment is also similar to that of other businesses for such investments as research and development. This tax deduction is estimated to save the independent oil and gas producers about $0.3 billion in fiscal year 2021.
Another tax deduction is the Domestic Manufacturing tax deduction, which allows all industries and businesses (not just oil companies) to deduct a certain percentage of their profits—for the oil and gas industry, it is 6 percent, while for all other industries (software developers, video game developers, the motion picture industry, and green energy producers, among others), it is 9 percent.
If the President’s proposed budget passes, Americans will see oil prices and gasoline prices continue to increase as they did during Biden’s first year in office. His anti-oil and gas policies helped raise the price of gasoline prices by about a $1 a gallon. It makes producing domestic energy more expensive, and drives investment to foreign shores. The same day that the proposed FY 2023 budget was released, Dr. Cecilia Rouse, chair of the Council of Economic Advisers, said that gas and energy prices are expected to rise further due to U.S. sanctions imposed on Russia. She did not mention that the Biden budget removes tax deductions for the oil and gas industry.
The Biden administration continues to blame high gasoline prices on anyone other than the Biden administration. Biden’s folks have blamed the sanctions on Russia for the price increase calling it “Putin’s price hike,” or they say that oil companies have engaged in “price gouging” and “profiteering,” or that oil companies are allowing 9,000 approved leases on federal land to go unused. The Biden administration is using these ploys to distract attention from Biden’s energy policies, which suppress long-term investment in U.S. fossil-fuel infrastructure. Instead of reversing his anti-oil and gas policies, Biden is begging overseas producers to increase output and has even sent a delegation to Venezuela to help revive its oil industry, which has been destroyed by the country’s adoption of socialism.
Biden continues his war on the oil and gas industry with policies to suppress long-term domestic investment. The most recent example is his proposed budget for FY 2023 that, if passed, would remove tax deductions for oil and gas companies. The outcome would be higher oil and gasoline prices for Americans coupled with less energy security. Biden will continue to pass the blame of higher energy prices onto other entities as he has done with his other anti-oil and gas policies: cancellation of the Keystone XL pipeline permit, ban on new drilling on federal lands, ban on oil development in ANWR and the Naval Petroleum Reserve-Alaska—to name just a few. Instead, he wants to focus taxpayer dollars on climate change, funding other countries by $11 billion—over ten times more than in fiscal 2022.