Revenues
Repeal Certain Tax Preferences for Extractive Industries
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Revenues | |||||||||||||
| Repeal the expensing of exploration and development costs | 1.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.6 | 1.1 | 0.7 | 0.6 | 0.9 | 10.5 | 15.1 | |
| Disallow the use of the percentage depletion allowance | 1.3 | 2.0 | 2.0 | 2.1 | 2.2 | 2.2 | 2.3 | 2.4 | 2.4 | 2.4 | 9.6 | 21.3 | |
Source: Staff of the Joint Committee on Taxation.
Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections.
When calculating their taxable income, firms in most industrial sectors in the United States are generally allowed to deduct a portion of the investment costs they incurred that year and in previous years. The portion of those costs that is deductible depends on prescribed rates of depreciation or, for certain natural resources, depletion. Costs are deducted over a number of years to reflect an asset’s rate of depreciation or depletion.
In contrast, the U.S. tax code treats extractive industries that produce oil, natural gas, coal, and hard minerals more favorably. Two tax preferences in particular give extractive industries an advantage over other industries:
- One preference allows producers of oil, gas, coal, and minerals to “expense” some of the costs associated with exploration and development. Expensing allows companies to fully deduct such costs as they are incurred rather than waiting for those activities to generate income.
- A second preference allows extractive industries to use a “percentage depletion allowance.” Through that allowance, certain extractive companies can deduct from their taxable income between 5 percent and 22 percent of the dollar value of material extracted during the year, depending on the type of resource and up to certain limits. For each property they own, firms take a deduction for the greater of the percentage depletion allowance or the amount prescribed by the cost depletion system, which allows for recovery of investment costs as income is earned from those investments.
- This option includes two different approaches to limiting tax preferences for extractive industries. The first approach would replace the expensing of exploration and development costs for oil, gas, coal, and hard minerals with the rules for deducting costs that apply in other industries. The second approach would eliminate the percentage depletion allowance.