Finance News

Biden’s Proposed Tax Increases on Fossil Fuel Explained

The Tax Foundation has found that President Biden’s plan to repeal so-called fossil fuel “tax breaks” could marginally benefit the environment but at the cost of denying the fossil fuel industry normal cost recovery.

That would subject the industry to additional layers of tax not faced by other industries in the States or abroad, and ultimately disadvantaging U.S. companies and workers in favor of foreign suppliers, mainly in the UK and Europe, Saudi Arabia, China, and Russia.

The study also shows that 2018 Internal Revenue Service data does not indicate any substantial tax preference for the oil and gas extraction industry, which paid: 

  • 19.3 percent of net income in federal corporate income taxes, compared to 10.6 percent on average for all industries
  • 86.8 percent of net income in state and local taxes and licenses, compared to 19.8 percent on average for all industries

What Biden is proposing: The Administration has proposed eliminating or replacing several existing tax provisions which they score at raising $120 billion over 10 years. Those provisions can be broken into five categories. 

  1. Cost Recovery Provisions (projected to raise $14.3 billion): Biden’s proposal would reduce oil and gas companies’ abilities to fully expense their investments. 
  2. Percentage Depletion (projected to raise $10.5 billion): Today, some taxpayers are allowed to deduct a fixed percentage of their gross income derived from property (percentage depletion) or a portion of certain acquisition costs (cost depletion). The Biden plan would force companies to use cost depletion. 
  3. Tax Credits ($8.3 billion): The Biden proposal would eliminate the tax credit for marginal wells and the enhanced oil recovery credit.
  4. Other Provisions ($2 billion): There are a handful of domestic tax provisions the Administration has proposed that are designed to raise revenues from the fossil fuel industry, such as taxing publicly traded fossil fuel partnerships as C corporations. 
  5. International Provisions ($86.2 billion): The Biden plan calls for raising taxes on U.S. multinational oil and gas companies by including foreign oil and gas income in the Global Intangible Low-Tax Income (GILTI) regime and by denying foreign tax credits.

A better way to protect the environment, limit greenhouse gasses, and fund infrastructure investments would be for the White House to consider taxes on consumption. This could be achieved through higher gas taxes or a carbon tax with a border adjustment. 

“As a general rule, policymakers should aim to treat the fossil fuel industry as fairly and as simply as possible, accounting where necessary for particular features of the industry,” the report concluded. “If the Biden administration aims to protect the environment and reduce carbon emissions, taxing consumption of fossil fuels is clearly more beneficial than taxing production.”

CLICK HERE to read the full report.

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