Newsom’s Proposed Budget Would Eliminate Tax Benefits for Independent Oil and Gas Producers
Governor Gavin Newsom’s proposed 2024-2025 budget would eliminate three tax benefits for independent oil and gas producers beginning in the 2024 tax year. The budget would repeal the immediate deduction for intangible drilling costs, the percentage depletion for fossil fuels, and the tax credit for enhanced oil recovery costs.
The governor’s budget summary refers to these tax provisions as “subsidies” and states that repealing them would increase state revenues by $22 million in 2024-25 and by $17 million a year in subsequent years. The proposals come along with proposed spending cuts and delays to address the state’s $37.9 billion deficit. (See Newsom’s Proposed Budget Cuts and Delays Spending on Key Climate Programs.)
Immediate Deduction for Intangible Drilling Costs
The budget would eliminate the provision that allows oil producers to deduct up to 70% of intangible oil and gas drilling costs immediately. These costs include such work as surveys, ground clearing, drainage, and repairs. The remaining 30% of these costs is required to be amortized over five years. Independent oil producers can deduct 100% of intangible drilling costs immediately.
California, conforming with federal tax law, has allowed the immediate deduction of these costs since 1987. This immediate deduction benefit is designed to encourage investment in oil production, given the risky nature of oil and gas exploration and production. The repeal of this tax benefit will likely further discourage investment from independent producers.
Percentage Depletion Rules for Fossil Fuels
The budget would also eliminate the allowance to deduct a fixed percentage (15% for independent producers) of gross income that is higher than the normal cost-depletion method when it comes to resource depletion of mineral and other natural resources. California is in conformity with federal law and has allowed this benefit since 1993.
Enhanced Oil Recovery Costs Credit
The budget would also eliminate the benefit that allows small, independent oil producers a tax credit of 5% of their qualified enhanced oil recovery (EOR) costs if the reference price of domestic crude oil exceeds a specified threshold for the preceding year. Taxpayers who are retailers of oil or natural gas and those who are refiners of crude oil whose daily output exceeds 50,000 barrels are not eligible for the credit. This benefit applies only when oil prices are low and has not applied recently.
Pressure from Environmental and Climate Groups
The administration’s proposals were more limited than those pushed by a coalition of environmental and climate groups. In a letter to Newsom and legislative leaders, the coalition called for eliminating a broader range of business tax credits:
“Water’s Edge Election”
Research and Development Credit
Accelerated Depreciation of Research and Experimental Costs
Percentage of Depletion of Mineral and Other Natural Resources
Intangible Drilling Cost Deduction
The group also requested that the state Department of Finance identify “all current tax expenditures both specifically for the oil and gas industry and broader corporate tax expenditures that the oil and gas industry benefit from and utilize.” The group’s main focus is on the state’s “Water’s Edge Election,” which allows for companies to be taxed by the state only on income attributed to the state.