March 20, 1975
Page 7811
Mr. MUSKIE. Mr. President, I support the amendment of the Senator from South Carolina, relating to the repeal of the percentage depletion allowance for oil.
I support the repeal of the percentage depletion allowance because like many provisions in the Internal Revenue Code, it represents a form of tax policy which has been retained far longer than necessary to induce certain business activity – in this case the development of new petroleum resources at a time when revenues for oil producers have reached windfall profit proportions.
In my own tax reform proposal, introduced in the last Congress, I suggested a change in the percentage depletion allowance. Since that time, increased revenues from the rising price of oil have grown so large as to warrant outright repeal of this provision.
At the same time, I believe there is recognition in the Senate of the need to sustain and encourage oil development efforts on the part of certain smaller producers. While I believe the better proposal is one which would retain the allowance for only those producers whose operations are pumping less than 1,000 barrels of oil a day, or an equivalent quantity of natural gas, the 2,000 barrel limitation represents a worthwhile compromise which I join in supporting.
The necessity for the depletion allowance to oil producers has been a subject of debate in the Congress since its initial adoption more than a half-century ago.
In 1969 it was decided that the original allowance of 27.5 percent was higher than needed to stimulate development and build up reserves. The reduction to 22 percent was a recognition that the tax inducement granted by percentage depletion in 1969 was substantially greater than it was in 1926.
When we examine the record of the of industry in the development of oil producing wells over the past several years and compare that record with the dramatic rise in oil revenues, it is clear that the depletion allowance has not served as the continued stimulus for development it was designed to be. Rather, after-tax profits deriving from price increases are far more important than percentage depletion as incentives for producing more oil.
For example, in 1955, the number of well completions recorded by the oil producers was 31,657. Since that time there has been a steady decline in well completions.
In 1960, the number had fallen to 21,186. By 1970 it was down to 12,992, and by 1973 well completions totaled only 9,902.
Then, in 1974, at a time when oil profits were beginning to escalate, well completions jumped to 12,817. The decline in completed wells was uninterrupted and not perceptibly affected by the 1969 reduction in the depletion allowance from 27.5 percent to 22 percent.
Rather the turnaround accompanied the resurgence in oil profits.
A recent Library of Congress study on the oil depletion allowance demonstrates that as a result of recent increases in the price of oil the domestic U.S. oil industry will reap $6.4 billion in after-tax windfall profits in 1975; $2.4 billion of this rise is attributable to the 22 percent oil depletion allowance.
The study assumes a base price of $4.25 per barrel before the recent price rise and a 1975 price of $5.25 for old oil and $11 for new oil. The figure is considered a windfall profit because it is in addition to the profits the industry would be earning if oil were still selling at $4.25 a barrel.
Certainly our national demand for new energy sources will require increased development of oil wells. It would seem, however, that the cash flow generated by recent oil price increases combined with other provisions of the Tax Code, offer more than sufficient incentives to achieve this production.
Mr. President, at a time when the Federal budget is under increasing economic pressures and with the corresponding need to stimulate other areas of our sagging economy, it does not seem prudent or justifiable to continue this multibillion dollar subsidy of the entire oil industry.