Three Steps Toward a More Environmentally Sensitive Tax Code

Around the nation, environmentally minded Americans are taking steps to achieve e a greener nation. The tax code may not be the most obvious tool for achieving environmental change, but reforming some tax giveaways to oil and gas companies could help level the playing field between fossil fuel manufacturers and more sustainable energy sources. 

• Stop pretending oil companies are “manufacturers.” In 2004, Congress decided to enact a special tax deduction for 9 percent of the income of domestic manufacturers. A lobbying frenzy quickly transformed the bill so that the definition of manufacturing included film production, coffee, and, yes, the oil and gas industry. Paring back the manufacturing deduction to focus on actual manufacturing—and excluding oil and gas production from this lucrative tax break—would be a fine way to put fossil fuels on a level playing field with more sustainable energy sources.

• Repeal expensing of intangible drilling costs. In general, when companies make investments in capital assets, they are allowed to write off the cost of those investments gradually, over the life of the assets. But when oil companies spend money on materials and equipment for drilling, thanks to their lobbying clout, they get to write off these expenses immediately. This amounts to an interest-free loan from the federal government.

• Repeal “percentage depletion” tax breaks for oil and gas. It’s bad enough that oil and gas companies can write off their investments faster than they wear out—but thanks to a special tax break, when these same companies gradually write off the cost of their oil fields, they can routinely deduct more than the fields are actually worth. This is because the so-called “percentage depletion” rule lets oil companies write off a flat percentage of their gross revenues from production, even after already writing off the full cost of the oil fields.

A number of lawmakers have sensibly proposed paring back or repealing these tax breaks. Most recently, the “End Polluter Welfare Act,” jointly sponsored by Sen. Bernie Sanders (I-VT) and Rep.Keith Ellison (D-MN) would repeal two of the tax breaks mentioned above—expensing of intangible drilling costs and the “manufacturing” designation for oil and gas production—was introduced this week.

As we have noted before, these tax breaks are part of a network of unwarranted tax breaks that subsidize the production and use of fossil-fuel technologies, to the tune of billions of dollars a year. As millions of Americans observe Earth Day by making an effort to live in more sustainable, environmentally friendly ways, Congress’s to-do list to mark the occasion should start with pulling these tax breaks out by the roots.