US Budget’s impact on resource industry sectors.

3 02 2010

Yesterday the U.S. President budget was made available and departments have published their Green Books. The latter expand on the President’s budget proposal and give clarifications on the measures and initiatives envisioned. A few items are of relevance to resource sectors and if implemented would end series of preferences strongly lobbied for by industry in the past.

Oil, gas and coal.

The President’s Budget, as currently standing, proposes to repeal about twelve tax preferences applicable to investments and expenses related to coal as well as oil and gas production activities. These include tax credits, exemptions, depletion deductions as well as accelerated capital cost allowances. These measures are being repealed as they counter the government’s objective of promoting renewable energy. This is also in line with the engagement taken by the United States in the G-20 Summit in Pittsburgh to phase out fossil fuels subsidies. Also, the repeal of these measures is expected to save the U.S. Government about US $39 billion in (otherwise foregone) revenues in the coming five years. For more information on the measures being repealed, refer to the Department of the Treasury’s Green Book.

Royalties and Industry Fees.

Let me quote. The current proposal” improves the return to taxpayers from U.S. mineral production through royalty reforms and industry fees.” The use of the word reform alone should have given you goose bumps but the use of “return to the taxpayer” is a further cause of horripilation as it hints at a rise in royalty rates. Take a deep breath; it might not be as bad as one would think.

The Department of Interior’s Green Book highlighted, among other things, that the royalty in-kind program will be terminated which is not new as the program started phasing-out in late 2009. The Department also hinted that royalty rates will be “adjusted” to ensure, for example, that proper royalties are paid on transported and processed natural gas. A lot will also be done to ensure compliance with the system of royalties which makes sense from a public finance perspective as royalties and other industry fees constitute the largest non-tax source of revenues.

In sum, measures targeted to extractive industries are aimed at raising revenues while closing loopholes and removing macroeconomic inefficiencies that are costly for government and have for effect of distorting the effective allocation of capital (I am talking about tax preferences here). I am unsure of how these measures are going to be welcomed by the industry. Actually that’s a lie. Nobody likes having its lollipop taken away. As industry prepares lobbying efforts, it could be interesting to follow this issue.

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16 02 2010
Flash News! Update on U.S Coal, Mongolia & [lots of other things] « Just Digging: a Mining and Metals blog

[…] in the U.S. In the entry on the U.S. Budget proposal, I have warned of the backlash that the decision to repeal corporate income tax exemptions for the […]

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