Congressional Republicans are facing mounting pressure from the White House to rescind oil and natural gas tax breaks in a deal aimed at reducing the federal deficit. Producers say they plan to fight to retain the tax breaks, but they concede that it won’t be easy if the repeal of industry tax deductions is part of a “grand bargain” to cut the deficit.

In a news conference at the White House Wednesday, President Obama said that “the tax cuts I’m proposing we get rid of are tax breaks for millionaires and billionaires, tax breaks for oil companies and hedge fund managers and corporate jet owners.

“It would be nice if we could keep every tax break there is, but we’ve got to make some tough choices here if we want to reduce our deficit…If we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars, then that means we’ve got to cut some kids off from getting a college scholarship.”

Obama said he believed it’s “only fair to ask an oil company or a corporate jet owner that has done so well to give up a tax break that no other business enjoys. I don’t think that’s real radical.”

Obama indicated that he’d support an extension of the payroll tax, which Republicans favor, in exchange for the tax hikes to “millionaires and billionaires” and oil and gas companies.

“If Republicans can be tempted to consider broader tax relief, changes to oil and natural gas tax preferences look increasingly likely. Democrats have been quoting $40 billion in potential tax revenue from these changes — implying that at this juncture they plan to rescind tax preferences industry-wide, not just for the [oil and gas] majors,” wrote energy analyst Christine Tezak of Robert W. Baird & Co.

Obama is seeking to repeal “tax deductions that apply to all of the industry. He is going after the heart of the tax deductions,” such as percentage depletion, the Section 199 manufacturing tax deduction and expensing of intangible drilling costs, said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America, which represents independent producers.

“We’re working our best to…not allow this to happen,” he said. But Fuller acknowledged if they “come up with some sort of grand bargain [on deficit reduction and extending the debt limit], it will be harder to piece out the components” on the oil and gas tax breaks and debate the merits.

“The Republicans haven’t indicated they’ll take a deal. If this discussion gains traction in the Senate, the House may have to consider it. At present, we handicap this possibility at about 50-50, and very fluid,” Tezak said. It’s unclear if a deficit-reduction deal will be reached before Congress leaves for recess in early August. If a deal is agreed to by then and it contains tax provisions, it would most likely be sent to the House first for a vote, Fuller said.

The Obama administration’s efforts to repeal oil and gas tax breaks have been unsuccessful in past years, but this is the first time a proposal has been tied to a deficit-reduction package. The most recent defeat came in May when Senate Republicans defeated a Democratic measure to repeal the tax breaks for just the five largest producers — Chevron Corp., BP plc, Royal Dutch Shell plc, ConocoPhillips and ExxonMobil Corp. (see Daily GPI, May 19).

Rather than raising taxes, Jack Gerard, president of the American Petroleum Institute, said the administration should give producers greater access to public lands to increase revenue stream to the federal government. “Raising taxes on an industry that already contributes more than $86 million every day to the federal government takes us in the wrong direction,” he said.

“The United States is sitting on some of the largest energy reserves in the world, but many of these reserves are currently off limits. If the government allowed for the responsible development of our own resources at home, we could create over one million new America[n] jobs [and] increase revenues to our government by hundreds of billions of dollars,” Gerard said.

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