End Oil and Gas Tax Subsidies Act of 2025
- Sponsor
- Rep. Casten, Sean [D-IL-6]
- Committees
- Ways and Means Committee (primary)
- Last action
- Jan 14, 2025
Bottom line
The bill aims to increase federal revenue and align tax policy with climate goals by repealing various tax incentives and deductions for the fossil fuel industry, potentially increasing their tax burden and impacting domestic energy production.
What it actually does
This bill proposes to eliminate several long-standing tax provisions beneficial to the oil and gas industry. It repeals tax credits for marginal wells and enhanced oil recovery, ends deductions for intangible drilling costs and tertiary injectants, and eliminates percentage depletion for oil and gas wells. Additionally, it extends the amortization period for geological and geophysical expenditures, restricts the qualified business income deduction for oil and gas activities, prohibits LIFO inventory accounting for major integrated oil companies, and modifies foreign tax credit rules for dual capacity taxpayers. The bill also clarifies that tar sands and other unconventional oils are included in the definition of crude oil for excise tax purposes.
Proponents argue
Proponents argue that these tax provisions constitute outdated 'subsidies' for a mature and profitable industry, distort market competition, and hinder the transition to clean energy. They contend that repealing these tax breaks will level the playing field, generate significant federal revenue, and ensure that the oil and gas industry pays its fair share, aligning U.S. tax policy with environmental objectives.
Opponents contend
Opponents argue that these tax provisions are not subsidies but essential deductions and credits that reflect the high capital costs and risks inherent in oil and gas exploration and production. They contend that repealing them would increase operating costs for domestic producers, lead to reduced investment, decrease domestic energy supply, raise energy prices for consumers, and ultimately harm U.S. energy security and job creation.
The bill is concise and clearly structured, making it relatively straightforward for an informed reader to understand its core provisions and implications within a short timeframe.
Section 2
Extends Amortization Period for Geological and Geophysical Expenditures
This section amends the Internal Revenue Code to increase the period over which oil and gas companies must amortize (deduct over time) their geological and geophysical expenditures from 24 months to 7 years. It also removes a specific provision that allowed independent producers to use the shorter 24-month period, effectively standardizing the longer amortization period for all oil and gas entities.
Supporters argue
Proponents argue that extending the amortization period aligns the tax treatment of these expenditures more closely with other industries and reduces a specific tax preference for fossil fuel companies, contributing to a fairer tax system and increased federal revenue.
Critics contend
Opponents contend that this change increases the upfront cost of exploration, making it less attractive to invest in new domestic oil and gas projects. They argue it could disproportionately impact smaller, independent producers who rely on faster cost recovery to manage cash flow and risk.
Tradeoffs
The provision balances the goal of increasing federal tax revenue and reducing industry-specific tax preferences against the potential for discouraging domestic oil and gas exploration and investment.
Section 3
Repeals Credit for Producing Oil and Gas from Marginal Wells
This section repeals Section 45I of the Internal Revenue Code, which currently provides a tax credit for the production of crude oil and natural gas from marginal wells. Marginal wells are those that produce small amounts of oil or gas, often making them less profitable to operate without specific incentives.
Section 4
Repeals Enhanced Oil Recovery Credit
This section repeals Section 43 of the Internal Revenue Code, which provides a tax credit for qualified enhanced oil recovery (EOR) costs. EOR techniques involve injecting substances like steam, carbon dioxide, or chemicals into oil reservoirs to increase the amount of crude oil that can be extracted.
Section 5
Eliminates Deduction for Intangible Drilling and Development Costs (IDCs)
This section amends the Internal Revenue Code to prohibit taxpayers from deducting intangible drilling and development costs (IDCs) for oil and gas wells incurred after December 31, 2024. IDCs include expenses like wages, fuel, repairs, and supplies that are necessary for drilling and preparing wells for production but have no salvage value. Currently, these costs can often be deducted immediately, providing a significant tax benefit.
Section 6
Repeals Percentage Depletion for Oil and Gas Wells
This section repeals Section 613A of the Internal Revenue Code, thereby eliminating the percentage depletion allowance for oil and gas wells. Percentage depletion allows producers to deduct a fixed percentage of their gross income from a property, regardless of their actual cost basis, potentially allowing deductions that exceed the original investment. This differs from cost depletion, which is limited to the cost of the asset.
Section 7
Repeals Deduction for Tertiary Injectants
This section repeals Section 193 of the Internal Revenue Code, which allows for a deduction for the cost of tertiary injectants used in enhanced oil recovery (EOR). Tertiary injectants are substances like carbon dioxide, steam, or chemicals injected into oil reservoirs to increase pressure and improve oil flow, thereby extracting more oil.
Section 8
Eliminates Passive Loss Exception for Oil and Gas Working Interests
This section amends Section 469(c)(3) of the Internal Revenue Code to terminate the exception that allows taxpayers to treat losses from a working interest in an oil or gas property as non-passive, even if they do not materially participate in the activity. Without this exception, such losses would be subject to passive activity loss limitations, meaning they could only be deducted against passive income.
Section 9
Excludes Oil and Gas Activities from Qualified Business Income Deduction
This section amends Section 199A(c)(3)(B) of the Internal Revenue Code to add the "production, refining, processing, transportation, or distribution of oil, gas, or any primary product thereof" to the list of specified service trades or businesses. This means that income from these oil and gas activities would be subject to limitations or disallowance for the qualified business income (QBI) deduction, which generally allows eligible pass-through businesses to deduct up to 20% of their qualified business income.
Section 10
Prohibits LIFO Accounting for Major Integrated Oil Companies
This section amends the Internal Revenue Code to prohibit "major integrated oil companies" from using the Last-In, First-Out (LIFO) inventory accounting method. LIFO assumes that the last goods purchased are the first ones sold, which can result in lower taxable income during periods of rising inventory costs. The bill defines a "major integrated oil company" based on specific thresholds for worldwide crude oil production (at least 500,000 barrels/day), gross receipts (over $1 billion), and refinery runs (over 75,000 barrels/day), with rules for controlled groups and related persons.
Section 11
Modifies Foreign Tax Credit Rules for Dual Capacity Taxpayers in Oil and Gas
This section amends the Internal Revenue Code to limit the foreign tax credit for "dual capacity taxpayers" with respect to their combined foreign oil and gas income. A dual capacity taxpayer is a person subject to a foreign levy who also receives a specific economic benefit from that foreign country. The amendment states that the amount considered a creditable tax cannot exceed what would have been paid if the taxpayer were not receiving such an economic benefit. This aims to prevent companies from recharacterizing royalties or other payments for economic benefits as creditable foreign income taxes.
Section 12
Clarifies Tar Sands and Other Unconventional Oils as Crude Oil for Excise Tax Purposes
This section explicitly expands the definition of "crude oil" in the Internal Revenue Code for excise tax purposes to include bitumen, bituminous mixtures, oil derived from tar sands, and oil derived from kerogen-bearing sources (like oil shale). It also grants the Secretary of the Treasury regulatory authority to include other fuel feedstocks or finished fuel products if they are customarily transported and pose a significant risk of hazard in the event of a discharge, consistent with the Oil Pollution Act of 1990.
This section contains numerous conforming amendments to various sections of the Internal Revenue Code (e.g., 45H, 57(a)(1), 291(b)(4), 613(d), 613(e), 705(a), 993(c)(2)(C), 1202(e)(3)(D), 1367(a)(2), and 1446(c)) to remove references to Section 613A, which is repealed by the bill. These amendments ensure that other parts of the tax code correctly reflect the elimination of percentage depletion for oil and gas wells.
Section 6(b)
Why it matters:This is standard legislative practice to ensure consistency across the tax code when a major section is repealed or amended. It's not intentionally evasive but requires detailed knowledge of the tax code to fully appreciate the scope.
Case for: Ensures the tax code remains internally consistent and avoids unintended conflicts or ambiguities after the repeal of percentage depletion. It's necessary for proper legal function.
Case against: No specific opposition is typically raised against conforming amendments themselves, as they are technical necessities once the primary policy decision (repealing percentage depletion) is made.
Estimated impact: These amendments have no direct fiscal impact but are crucial for the legal and administrative effectiveness of Section 6's primary repeal, which has a substantial fiscal impact.
This section defines a "major integrated oil company" for the purpose of prohibiting LIFO accounting. The definition includes specific thresholds: average daily worldwide crude oil production of at least 500,000 barrels, gross receipts exceeding $1 billion, and average daily refinery runs exceeding 75,000 barrels. It also includes complex rules for aggregating entities under common control or related persons to meet these thresholds.
Section 10(a), new Section 472(h)
Why it matters:This level of detail is necessary for precise legal application and to prevent circumvention of the rule. It's standard for tax legislation to include specific definitions and anti-abuse rules.
Case for: Ensures that the LIFO prohibition is specifically targeted at the largest, most integrated oil companies, which proponents argue are best equipped to absorb the change and have benefited most from the LIFO tax deferral. The detailed rules prevent companies from restructuring to avoid the new requirement.
Case against: Opponents might argue that the complexity of the definition and aggregation rules creates an administrative burden for companies and the IRS, potentially leading to disputes over classification. They may also argue that the thresholds are arbitrary or unfairly target certain companies.
Estimated impact: This definition determines the scope of the LIFO prohibition, which could have a substantial fiscal impact on the affected companies and federal revenue. The impact is concentrated on a relatively small number of very large companies.
This section grants the Secretary of the Treasury broad regulatory authority to include additional fuel feedstocks or finished fuel products as "crude oil" or "petroleum product" subject to excise tax under Section 4611. This authority can be exercised if the Secretary determines that the classification is consistent with the definition of oil under the Oil Pollution Act of 1990 and if the product is produced in sufficient commercial quantities to pose a significant risk of hazard in the event of a discharge.
Section 12(b), new Section 4612(a)(10)
Why it matters:Delegating regulatory authority is common legislative practice to allow agencies flexibility to adapt to new products or evolving understandings without requiring new legislation. However, broad delegations can also be seen as a way to implement policy changes without direct congressional approval.
Case for: Allows the excise tax to remain relevant and comprehensive as new types of fuels and petroleum products emerge, ensuring that all substances posing similar environmental risks contribute to the Oil Spill Liability Trust Fund. It provides necessary flexibility to adapt to market and technological changes.
Case against: Opponents might argue that this grants too much power to the Secretary, allowing for potential expansion of the tax without direct congressional oversight. They could raise concerns about the lack of specific criteria for "sufficient commercial quantities" or "significant risk of hazard," leading to uncertainty for industry.
Estimated impact: The potential impact is unknown and depends entirely on future regulatory actions by the Secretary. It could expand the tax base for the Oil Spill Liability Trust Fund to new products.