Section 199

Background

The American Jobs Creation Act of 2004 includes IRC Section 199, which makes deductible a portion of income derived from domestic manufacturing and production activities. For most U.S. manufacturers, the deduction will eventually be equivalent to a three-percentage point reduction (35 percent to 32 percent) in the corporate income tax rate for qualified domestic income. While the inclusion of oil and gas extraction and refining income for purposes of Section 199 had bipartisan support when the legislation was adopted, recent legislation has already limited the full phase-in of the deduction for domestic oil and gas activities.

Repeal of Section 199 manufacturing deduction could cost oil and gas jobs, hurt consumers, and increase oil imports.

Congress enacted the Section 199 deduction to encourage U.S. manufacturers to invest, expand and create jobs. Discriminatorily eliminating this deduction for the oil and natural gas industry will have the reverse effect, hurting American workers and prospects for economic recovery. Here’s why.

Repeal of the deduction would threaten about 1.8 million oil and gas worker jobs and nearly 4 million jobs producing goods and services used by the oil and gas industry. This would include well paying jobs held by petroleum geologists, refinery workers, rig builders, accountants, chemical engineers, environmental technicians and many other categories of workers.

Disallowing the deduction would force the industry to pay more in taxes, which would depress investment in new projects that could contribute to the production of energy Americans will be demanding in the future.

Eliminating the deduction would create special challenges for financing high-cost domestic projects. The United States is a mature producing region, which makes finding and producing oil and natural gas more expensive at home than abroad. Paying billions more in income taxes would make it harder to find the capital to build costly projects, such as a deepwater production platform in the Gulf of Mexico or a major refinery expansion. It would also reduce the number of projects companies can afford to invest in and encourage the flow of capital overseas, taking with it jobs and potential tax revenues and royalties.

By discouraging more oil projects at home, the repeal of the reduction would decrease domestic production, spurring an increase in oil imports. U.S. oil production has declined by nearly half since 1970.

By reducing oil production, elimination of the deduction would limit supplies, threatening tightness in oil markets and could lead to higher consumer prices. That would make it harder for our economy to grow jobs and get stronger.