House Revokes Oil Industry Subsidies and Tax Breaks

By J.R. Pegg

WASHINGTON, DC, January 18, 2007 (ENS) - Legislation eliminating some $14 billion in federal subsidies and tax breaks for oil and gas companies was approved today by the U.S. House of Representatives. The bill, which includes language to funnel the money to renewable energy projects, passed by a vote of 264-163.

The bill was the final piece of House Speaker Nancy Pelosi’s "100-hour agenda" and the California Democrat promised it is only the start of an aggressive effort to tackle the nation’s energy needs and to address climate change.

Pelosi

House Speaker Congresswoman Nancy Pelosi of California (Photo courtesy Office of the Congresswoman)
Pelosi told reporters today that she is creating a new Select Committee to develop a package of legislation focused on energy independence and global warming, with the goal of passing the bills by July 4.

"Today is a start," Pelosi said. "It's just a beginning. I promise to do everything in my power to achieve energy independence ... and to stop global warming,"

"By investing in American ingenuity, Democrats will accelerate the implementation of existing clean, energy-efficient technologies," Pelosi said. "We will promote homegrown alternatives, creating good paying jobs while bolstering our national security, sending our energy dollars to the Midwest, not the Middle East."

The legislation has a long way to go before it becomes law and its prospects in the Senate are uncertain. Some Democrats are keen to see a larger effort to revamp royalty payments for the oil and gas industry, while some Republicans and the Bush administration oppose several key parts of the bill.

The measure would raise more than $7.5 billion over the next 10 years by closing tax breaks for oil and gas producers as well as more than $6 billion over the same time period by repealing and restructuring royalty payments.

That money would be used to create a research and development fund for renewable energy, alternative fuels and energy conservation programs.

House Majority Leader Steny Hoyer, a Maryland Democrat, said the legislation is "but a first down payment on the promise of a new energy future for our country."

McGovern

Congressman James McGovern of Massachusetts has been in office since 1997. (Photo courtesy Office of the Congressman)
"At last Congress is putting its money where its mouth is and increasing our investment in renewable energy," said Representative James McGovern, a Massachusetts Democrat. "We are not just talking the talking, we are walking the walking. We are not promising any quick fixes … but the bill before us today will put us on the path to energy independence."

Opponents argued the measure will hurt the economy, costing jobs and raising energy costs, while doing little to spark increased development of renewable energy and alternative fuels.

"There is nothing in the bill that would guarantee the money is spent on renewable energy," said Representative Marsha Blackburn, a Tennessee Republican. "While a new reserve is created, it does not have one single enforcement mechanism."

Representative Don Young, an Alaska Republican, labeled the bill "communist Red" and said it illustrated that the "road to hell is paved with good intentions."

"It will increase the competitive edge of foreign oil imported to this country," Young said. "If the problem is foreign oil and it is, why increase taxes and make it harder to produce American oil and gas? That makes no sense to me."

Young

Congressman Don Young of Alaska (Photo courtesy Office of the Congressman)
Specific criticism of the legislation centers on two provisions - one that eliminates a major corporate tax break and a second designed to recoup lost royalty payments from drilling in the Gulf of Mexico.

The tax break, created in 2004 to protect domestic manufacturers from foreign competition, gives oil and gas companies a reduction in the corporate tax rate on profits from domestically produced products. Rescinding the tax break, which critics argue never should have been extended to the oil and gas industry, will bring in more than $7 billion over 10 years.

"This is an ill-gotten windfall amounting to $700 million a year and it is time it be withdrawn," said Representative Earl Pomeroy, a North Dakota Democrat.

"We pay once at the pump for gasoline already," added Representative Jay Inslee, a Washington Democrat. "We shouldn’t have to pay again on April 15 to line the pockets of the oil and gas industry. It is common sense."

But the White House argues the provision is in effect a tax increase, singling out the oil and gas industry for punitive tax treatment.

Industry groups, including the National Association of Manufacturers, warn revoking the tax break will increase energy costs for consumers and businesses - a position voiced by opponents during debate in the House.

Representative Phil English, a Pennsylvania Republican said eliminating the tax break "will further erode the U.S. comparative advantage, forcing more and more of our good-paying manufacturing jobs overseas."

"This legislation is bad energy policy and bad tax policy," English told colleagues.

The royalty provision aims to alter about 1,000 deep water drilling leases for the Gulf of Mexico issued in 1998 and 1999 by the U.S. Interior Department's Mineral Management Service.

platform

BP's Thunder Horse oil platform in the Gulf of Mexico. Designed to process 250,000 barrels of oil per day and 200 million cubic feet per day of natural gas, Thunder Horse will be the largest producer in the Gulf. (Photo courtesy BP)
The agency failed to include language triggering royalty payments once oil prices reached a threshold of about $34 a barrel, an error that has already cost the government some $1 billion in lost royalties and could cost more than $10 billion over 25 years.

The legislation requires companies to either renegotiate the flawed leases or pay fees on production from those leases or be banned from purchasing new leases in the gulf.

The Bush administration favors voluntary negotiations to revise the leases and has completed negotiations with five companies. But at least 50 other affected companies argue the government has no right to force them to pay additional royalties.

Several House Republicans voiced support for the position that the contracts are valid and warned that the bill sets up a potential legal quagmire over leasing in the deep waters of the gulf.

"It opens up the floodgates for takings litigation," said Representative Mary Fallin, an Oklahoma Republican. "This is a trial lawyer’s dream bill."