Taxes are moving into the U.S. political spotlight as midterm congressional campaigns hit stride and the 1996 presidential election comes into view. The issue provides oil and gas producers a vehicle for an important legislative goal: relief from volatility in oil and gas prices. But success depends on how well producers align this goal with what a significant number of Americans see as important national interests.
The Republican Party will press the tax issue this week in its "Contract with America," a plan of legislation its members will push in the first 100 days of the next Congress if they win control of the House of Representatives. Tax measures will include cuts in the capital gains levy, repeal of recent tax hikes on some Social Security recipients, and deductibility for contributions to individual retirement accounts.
President Clinton will address taxes when he proposes his budget to Congress early next year. He's expected to offer families a tax credit of $500/child, an economized version of his tax cut for the middle class.
RELIEF THROUGH TAXES
None of this sounds like relief for oil and gas producers. But relief, if it happens at all, will and should come through the tax code.
And it is through the tax code, apparently, that politicians and parties will seek to define themselves this election season. Republicans obviously want to make a statement about their approach to the economy and the role of government. Clinton wants to show that Democrats care as much about family values as Republicans claim to do. And he certainly won't yield to Republicans on the economy as long as the U.S. expansion remains intact. Both sides will have to show concern for federal revenues.
While the parties extrapolate grand meaning from their tax pronouncements, producers should ask a grand question of their own: Is it, or is it not, in the national interest to promote taxable economic activity?
A government or political party that answers yes must at least consider some form of tax and royalty relief to producers keyed to oil prices. Relief would serve long term national economic interests. The challenge for producers is to distinguish those interests from their obvious commercial stakes in the outcome and to argue the case at the national-interest level.
Much production in the U.S., especially of oil, sits on the economic margin, with operating costs perilously close to revenues. When crude prices fall, production like this loses money. When losses become extreme, production must be shut in, usually forever.
ECONOMIC PRUDENCE
It would serve public economic interests not to let that happen. Shut-in wells generate no tax revenues, create no jobs, contribute nothing to economic growth and development. It would amount to simple economic prudence for the federal government to ease its take from oil and gas production in times of low prices in order to keep the tax base out of jeopardy.
Opponents to tax relief for producers focus on revenues that the government would forgo when crude prices fell below the relief trigger. They ignore the greater revenue losses that result when tax-paying activities cease. Their position so far prevails, and the government squanders tomorrow's dollars on today's dimes.
So producers should welcome the new attention taxes will receive in the politically intense months to come. It gives them a chance to pursue legitimate economic relief in its proper context. And it provides voters a glimpse at the difference between politicians seriously concerned about economic matters and those merely shopping for job security with other people's money.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
