Tax Policy:

Additional Petroleum Production Tax Incentives Are of Questionable Merit

GGD-90-75: Published: Jul 23, 1990. Publicly Released: Jul 23, 1990.

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Pursuant to a congressional request, GAO provided information on the effects of additional tax incentives for the petroleum production industry.

GAO found that: (1) the proposals it considered are expected to have small to modest effects relative to total U.S. petroleum production and consumption; (2) the administration's estimate of the average annual revenue loss for all of the proposed petroleum tax incentives combined is $400 million to $500 million; (3) the Department of Energy (DOE) estimates that future U.S. petroleum production would increase by a total of about 25,000 to 40,000 barrels per day; (4) the proposal for eased treatment of certain intangible drilling costs would cause federal revenue losses of $3 to $6 for each barrel of additional production; (5) there were concerns with the DOE modelling, including possible tendencies to overestimate production effects; (6) provisions applying to all existing production could lead to revenue losses per barrel of additional production that exceeded the price of oil; (7) oil tax incentives could provide other benefits in addition to petroleum production, but there are concerns over the incentives' ability to increase long-term energy security; (8) proposed incentives would reduce effective tax rates on petroleum production, but the marginal effective corporate tax rates for domestic petroleum production are already among the lowest for a major industry; (9) proposed tax incentives would add to the existing favorable treatment of some related petroleum production investments, but other proposals could provide even more preferential treatment; and (10) U.S. producers are making petroleum production investments abroad, due to factors other than taxes.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress passed a number of the provisions into law despite GAO reservations.

    Matter: Before approving additional tax incentives for petroleum investments, Congress should weigh carefully their costs and benefits. Given the expected federal revenue losses, providing additional tax incentives is not the most effective method of providing significant increases in U.S. energy security. In addition, where the incentives benefit types of activities and classes of producers that are already relatively favored by the tax code, they will tend to encourage relatively inefficient investments.


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