Alliance Presents Comments to House Ways & Means on Harmful Tax Provisions to EmploymentSept. 13, 2021 ** The following analysis was prepared in September of this year at the request and for the benefit of several Members of Congress from Texas as the House Ways and Means Committee was preparing for its markup of the Reconciliation Bill. ** Re: Negative Employment Effects of Eliminating Intangible Drilling Costs and Percentage Depletion The Texas Alliance of Energy Producers has prepared an employment impact estimate that would result from the repeal of Intangible Drilling Costs (IDCs) in its current form, and the elimination of the percentage depletion deduction. The methodology in terms of the ten-year time frame of the estimates is employed to make the data consistent with a study conducted by Rystad Energy for the American Petroleum Institute (API) that quantifies the potential negative employment impacts of repealing IDCs and raising the corporate tax rate. However, the estimates calculated herein focus on IDCs and the elimination of the percentage depletion deduction. The Rystad/API study considered a base case in 2031 that would result from no changes to the tax provisions under analysis, and then estimated the negative employment impacts to that base case from repealing IDCs, as well as raising the corporate tax rate to 25%. The study was conducted by basin (production region), however, rather than at the statewide level. The Alliance estimates also consider the base case employment scenario 10 years out, in 2031, that would result from no change in the tax provisions, and then estimate the negative employment impact at the statewide Texas level of repealing IDCs and eliminating the percentage depletion deduction. The Rystad/API study calculated negative employment impacts for IDC repeal and a corporate tax rate hike for three crude oil price scenarios – $40/barrel (“low”), $60/barrel (“mid”), and $80/barrel (“high”). The Alliance estimates contained herein are consistent with a $60-65/barrel crude oil price. Current crude oil prices are in excess of $70/barrel. Texas direct upstream (crude oil and natural gas exploration and production) employment consists of (1) crude oil and natural gas extraction employment, which is employees on the payrolls of operating and producing companies, (2) oilfield service companies, and (3) drilling companies. These three categories totaled approximately 240,000 employees at the height of the last cyclical peak in December 2018. That comprised about 1.9% of total statewide employment in Texas at that time. As of July 2021 there are approximately 166,000 direct upstream oil and gas employees in Texas, which is roughly 1.3% of total statewide employment in Texas. The negative employment impacts that would occur as a result of eliminating IDC expensing and the percentage depletion deduction take two forms: (1) direct industry jobs actually lost on company payrolls beginning at the time the elimination of the provisions takes effect, and (2) direct industry jobs not added over the next ten years that would otherwise be added under the current set of tax circumstances. The numbers must also be considered in terms of the indirect and induced effects of the direct negative employment impact. For purposes of calculating these “ripple effects”, we have used a conservative multiplier of 2.5 to estimate the negative impacts of repealing the current method of expensing intangible drilling costs. The estimates for employment impacts resulting from eliminating the percentage depletion deduction come directly from a study completed earlier this year by the National Stripper Well Association for which the Texas Alliance of Energy Producers was a partner association (and for which I served on the steering committee). That study looked at negative employment impacts of eliminating the percentage depletion deduction, which affects both operators/producers as well as royalty owners, and is a 15-year look into the future. The information presented herein simply pulls the employment impact for Texas at the 10-year mark from that study. Considering a base case of 252,000 direct upstream jobs in Texas in 2031 given no change in IDCs and percentage depletion, the following negative employment impacts are estimated:
In addition to the negative employment effects detailed above, the repeal or elimination of intangible drilling costs and percentage depletion have other negative repercussions as well, including:
As less capital is invested in Texas and US oil and gas development and production, production will inevitably decline, creating a likely combined scenario of higher prices to US consumers and increased imports into the United States to meet demand. Eliminating both provisions changes the math to US oil and gas producers by raising the tax burden and lowering the effective price received for domestically produced crude oil and natural gas. With regard to IDCs, labor cost itself is an intangible drilling cost and is often the greatest share of total IDCs. Attaching a higher tax burden to labor cost will without question reduce the amount of labor demanded. In other words, jobs lost and/or not created going forward are unavoidable consequences of repealing. Click here to download pdf of memo to House Ways & Means.
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