House Republicans fought back a Democratic drive last Thursday to repeal a major tax break for oil and natural gas producers. The issue now moves to the Senate, where its fate is uncertain.

The House bill, which would have repealed the Section 199 manufacturing tax deduction for the top five oil producers, was defeated by a vote of 241-171. The subsidy, which was enacted in 2004 to promote oil and gas development, allows producers to deduct from their tax liability 6% of the income that they derive from oil and gas produced onshore and offshore in the United States each year.

“In the Senate, we will act imminently to close these [Section 199 and other tax] loopholes,” wrote Senate Majority Leader Harry Reid (D-NV) and Sen. Robert Menendez (D-NJ) in a “Dear Colleague” letter last Wednesday. “Given the unprecedented number of lawmakers who have stepped forward in support of this idea for the first time, we believe this new push to end oil subsidies has a strong chance to succeed where previous efforts have failed. We intend to proceed with a bill that maximizes our chances of garnering bipartisan appeal.”

Senate Democrats could bring to the floor as early as this week (beginning May 9) a measure to eliminate billions of dollars in annual tax breaks for the five biggest oil companies. “That’s what we’re thinking,” Politico reported a Senate Democratic leadership aide saying. But a vote on the measure won’t be likely this week, it said.

Lee Fuller, vice president of government relations for the Independent Petroleum Association of America (IPAA), doubts there’s sufficient backing in the Senate to end the tax breaks. “I think it’s unlikely that there’s major support to change the tax code for oil and gas.” he said. Nevertheless Fuller noted “we have to be constantly vigilant” because tax proposals that claim to just target Big Oil often also affect independent oil and gas producers, which the IPAA represents.

During the House debate last Thursday, Democrats argued that repealing the Section 199 manufacturing tax deduction would reduce gasoline prices at the pump. But Fuller said there was no relation between the two. “They [Democrats] keep forgetting that we are essentially price-takers. The commodity market sets the prices.”

When a bill to roll back the tax breaks does come to the Senate floor, it’s unclear what legislative vehicle will be used — President Obama’s proposal to eliminate $4 billion in oil and gas tax breaks in fiscal years 2011 and 2012; or a still undefined measure by Reid. Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, also is drafting legislation to repeal billions of dollars in tax breaks for the five largest oil and gas producers.

The Senate finance panel has scheduled a hearing on the Baucus plan on Thursday (May 12). It proposes to eliminate the Section 199 manufacturing deduction, reduce the foreign tax credit for royalties payments to foreign governments and impose an excise tax on certain Gulf of Mexico leases.

“They [Senate Democrats] haven’t really framed what they want to bring to the floor. It’s in a state of uncertainty at this time,” Fuller told NGI. Jack Gerard, president of the American Petroleum Institute (API), also said the Senate legislative vehicle for repealing the tax breaks was up in the air. “I expect that they’re creative enough and experienced enough that he [Reid] will find whatever vehicle he believes is appropriate,” he said.

Fuller said the IPAA is most concerned about the excise tax in the Baucus plan because it would not only affect major producers operating in the Gulf, but also independent producers.

API is opposed to any legislation that would repeal tax breaks for oil and gas companies in general, and it particularly objects to the Baucus plan. Gerard questioned the constitutionality of a plan that punishes five individual companies by stripping them of their tax breaks. “We need to stay focused on energy policy, not demonizing industries,” he said.

“If it’s good for the broader industry…it [the Section 199 tax deduction] should be good for all segments of industry and business,” including oil and gas, Gerard said.

API’s push to retain the tax breaks for producers is at odds with what the major producers, Shell, BP and ExxonMobil, told Congress in 2005.”Testifying before the Senate in 2005, every CEO of the five biggest oil companies acknowledged that they do not need incentives to explore for oil and gas. And just this year, the former CEO of Shell Oil said ‘subsidies are not necessary,'” Reid and Menendez said in their “Dear Colleague” letter.

The House and Senate are at a standstill on key energy issues. “I think at this…stage of the process it’s premature to predict” whether a compromise can be reached between Democrats and Republicans in the two chambers on these energy issues, Gerard said. However he believes that “pressure will continue to mount” from the public on energy items, and that Congress will have a difficult time of ignoring it.

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