"The Democratic Plan"

The Democratic PlanThe Democratic Plan

H. Martin Gibson

Patton Boggs LLPDallas, Texas

Washington DC | Northern Virginia | New Jersey | New York | Dallas | Denver | Anchorage | Doha, Qatar

Thursday, October 9th, 2008

The Democratic PlanThe Democratic Plan• The Administrative Plan

• Speaker Pelosi intends to commence with another “100 hour” agenda.

• A windfall profits tax

• For later in the session:

• Energy Tax Extenders (but most passed with the EESA)

• Attacking the 1988 and 1999 OCS Leases

• Climate Control

• Re-imposition of prohibitions on drilling in the OCS

The Democratic PlanThe Democratic Plan• Similar to the Carter WPT

• Recently passed legislation tried to exclude the biggest oil companies; then discovered that Citgo has been omitted; added

• But it is perceived that the Carter WPT “did not work” so it will be different.

• Conclusion: probably will be applicable across the board –all production; huge lobbying effort to exempt various groups or entities.

The Democratic PlanThe Democratic Plan• Windfall Profits Tax

• Congressional Research Service (CRS) of Library of Congress researched WPT enacted in April, 1980.

• Actually an excise tax. • Reduced oil production from 1980 to 1988 by

from 1.2% to 8 %; dependence on foreign oil grew between 3% and 13%.

• If new WPT enacted as an excise tax • Expected to reduce domestic oil production

and increase oil imports.

The Democratic PlanThe Democratic Plan• Windfall Profits Tax• Specifics for 111th Congress not set; use

109th proposals as guides:• Alternatives

• Impose excise tax on both foreign and domestic oil• Reduce imported oil dependence• Higher crude oil prices• Likely higher oil industry profits

• “Undermining its original goals.”

• Corporate Income Surtax• “Corporate profit tax is relatively neutral in the short

run – few, if any, price and output effects occur because marginal production costs are unchanged in the short run.”


• Windfall Profits Tax• Corporate Income Surtax

• “Such a tax would recoup any recent windfalls with less adverse economic effects.”

• “Imports would not increase because domestic production would remain unchanged.”

• “In the long run such a tax is a tax on capital;• It reduces the rate of return, thus reducing the

supply of capital to the oil industry.


• Windfall Profits Tax• Even though “oil” is referred to in the study,

it is expected that the tax would apply to all fossil fuels (coal?).

• Old WPT had a tax credit for royalty owners. No sign of consideration of special treatment for royalty.

• Old WPT modification proposals had included eliminating oil industry “subsidies.”

• Percentage Depletion and IDC.


• Windfall Profits Tax• Prior Congressional Reasoning

• Perception of the oil industry• Both presidential candidates speak derisively of

“big oil.”• Concern that industry would reap enormous

revenues and profits• Congress believed that the huge redistribution of

income from energy consumers to energy producers would not be fair.

• Almost no distribution of WPT revenues to consumers; all spent by Congress


• Windfall Profits Tax• WPT proposals in the 109th Congress

• Excise Form (Dorgan, Kucinich, Kanjorski, DeFazio)• Tax of 50% of windfall “profits” (difference between

market price at the wellhead and a rate set by Congress) minus expenses in

• E&P • Refineries• Renewable electricity• Facilities for producing alcohol fuels or bio-diesel.

• Variations: Tax rate of 50%, 75% or 100%• “dependent on the extent to which profits exceed

a reasonable level.”• All versions included natural gas as well as oil.


• Windfall Profits Tax• Income Tax Form (Schumer, Larson,

Reed)• 50% tax on the excess of the adjusted

taxable income of the taxpayer for the taxable year over the average tax able income during a base period (2002 – 2006?)

• Limited in some versions to producers and integrated oil companies with sales above $100 million.


• Windfall Profits Tax• Variations on Income Tax Form

• In addition, would impose price controls on gasoline, ban drilling in ANWR, mandate minimum levels of inventory of crude and products, ban export of Alaskan oil, facilitate draw from SPR

• Kucinich would fund income tax credits for purchases of fuel-efficient passenger vehicles and grants for mass transit.


• Windfall Profits Tax• Variations on Income Tax Form

• Impose 100% tax on any profit above a 15% rate of return from the sale of crude oil, natural gas, or products of crude oil and natural gas.

• Revenues used to fund a program of gas stamps – similar to food stamps.

The Democratic PlanThe Democratic Plan• Drilling in the OCS

• Intent is to re-impose a ban on offshore drilling in areas subject to the previous Moratorium that expired in September.

• Not clear how to accomplish this. Options:• Strict environmental regulations to appear to

permit, yet deny, OCS leasing.

• Ban could be absolute.

• If there is a backlash, then will allow leasing from 50 miles to 100 miles if state agrees.


• Drilling in the OCS• State agreement is virtually guaranteed

not to occur because there will be no revenue sharing.

• 100 miles start point has no G&G basis; just divided total distance by 2

• Message by Democrats: if you do not want OCS drilling, we need more Democrats in Congress

The Democratic PlanThe Democratic Plan• Energy Tax Extenders

• Originally this had been agreed, substantively, in the House and Senate. It was a grab bag of mostly tax benefits and decreases.

• Energy credits, AMT partial relief, modification of tax treatment of coal, depreciation for biomass ethanol plants, “exclusion from heavy truck tax for idling reduction units and advanced insulation,” New York Liberty Zone tax credits, deduction of state and local taxes, the Indian employment credit, etc.

The Democratic PlanThe Democratic Plan• Energy Tax Extenders

• Most provisions included in the EESA, but with shorter extensions (except for the solar investment tax credit)

• If you did not get your tax goody this Session, you will have to wait until next Session.


• Section 199 of the IRC• Deduction allowed for 6% (9% for 2010) for qualified

production activities income. • Gross production receipts minus costs incurred but

term is limited to taxable income and includes natural gas.

• EESA• Section 401 freezes the deduction at 6%. Did

not include the draft elimination of deduction for major integrated and foreign owned oil companies.

• January• A very unpopular deduction among Democrats

and will be re-visited in the first 100 days.


• Attacks on the 1998 and 1999 OCS Leases.• When oil prices were low in the 1990s,

Congress wanted to encourage exploration in the Outer Continental Shelf

• But only off Texas and Louisiana, and Alaska

• Passed the OCS Deep Water royalty Relief Act of 1995 – the RRA


• RRA• Royalty relief.

• §303 of the RRA allows the Secretary to reduce or eliminate any royalty on any leases West of 87° 30’ West to promote development, production, or marginal production.

• §304 applies to new, deeper production (>200 meters) where it provides

• except that for new production as defined in clause … , in no case will that volume be less than 17.5 million barrels of oil equivalent in water depths of 200 to 400 meters, 52.5 million barrels of oil equivalent in 400–800 meters of water, and 87.5 million barrels of oil equivalent in water depths greater than 800 meters.


• RRA• In Santa Fe Snyder v. Norton (5th Cir. 2004), Interior

had issued regulations that denied §304 royalty reduction for production from existing fields, even if it were from a new lease. The 5th Circuit held that §304 applied to any new lease if the depth test were met.

• In Kerr-McGee v. Allred (pending at the 5th Circuit), Interior had inserted price threshold provisions (phase out over $28/bbl) in the lease which Kerr-McGee executed. Kerr-McGee says that §304 is clear and cannot be varied by Interior. Therefore no reduction in volumes that are royalty free.


• RRA• Leadership feels strongly that, regardless of

the statute, it is not fair for oil companies to receive prices for production, free of royalty, when those prices are much higher than anyone in Congress contemplated when the RRA was passed.

• Certain to see legislation trying to tax or undo such leases.

• Could be stopped by a decision by the 5th Circuit.• Leaves a feeling of unfairness sure to be

assuaged elsewhere.

The Democratic PlanThe Democratic Plan• Climate Change

• Both presidential candidates support carbon controls through “cap and trade.”

• carbon sequestration is just a means of reducing carbon output.


• Climate Change• Expected to take 4 years – not done in first

100 days• Not clear whether plan will grant credits to

existing facilities• Thus, disadvantaging new entrants

• Or require everyone to purchase carbon credits.

• Not clear what levels of reduction will be sought.


• Climate Change• Different approaches

• "cap and trade" approach. Aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load.

• baseline and credit program. Polluters that are not under an aggregate cap can create credits by reducing their emissions below a baseline level of emissions.


• Climate Change• October 7 Plan

• Dingell and Boucher introduced 461 page bill

• cap and trade system• covers 88% of GHG emissions• covers petroleum producers• covers sequestration sites• Targets: 6% 2005 levels by 2020; 44% below

by 2030


• Complicating factors – groups of states have started their own trading:

• RGGI – Regional Greenhouse Gas Initiative• Connecticut, Delaware, Maine, Maryland,

Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. Will cap CO2 emissions from the power sector, and then require a 10 percent reduction in these emissions by 2018


• Complicating factors• WCI – Western Climate Initiative

• The seven states are Arizona, California, Montana, New Mexico, Oregon, Utah and Washington. The Canadian provinces are British Columbia, Manitoba, Ontario and Quebec.

• slash regional greenhouse gas pollutants by about 15% below 2005 levels in the next 12 years

• In spite of federal pre-emption, efforts to reconcile the existing plans and all of the potential plans will take time.


Thursday, October 9th, 2008

H. Martin Gibson

Patton Boggs LLPDallas, Texas

Washington DC | Northern Virginia | New Jersey | New York | Dallas | Denver | Anchorage | Doha, Qatar

"The Democratic Plan"

Business

excise tax

tax rate

defazio tax

income tax credits

democratic plan drilling

energy tax extenders

foreign oil

oil imports