Tax Bill’s Impact to Vary Greatly Among Sectors : Heavy Manufacturing and Real Estate Seen Hard Hit; Technology, Retailing Win
The sweeping tax bill approved by congressional negotiators over the weekend is expected to have a dramatic impact on American industry. Heavy manufacturing and many real estate developers have railed against the loss of cherished tax incentives. But retailers and technology firms, which have long felt overtaxed, generally have cheered the move to lower overall corporate tax rates. While the enthusiasm of some early corporate tax-reform advocates has waned, some opponents have found the process less painful than anticipated.
With approval of a final bill by Congressional negotiators--and expected approval next month by the full House and Senate--American business is now bracing for this massive overhaul of the nation’s tax system. Here is a look at how various industries will be affected:
Energy
The oil and gas industry, already suffering from a collapse in prices, will pay an extra $3.8 billion in taxes under the reform legislation. But the vulnerable independent oil producers were protected on key issues, and Big Oil can live with the measure.
Late-hour changes worsened the final bill from the perspective of the business community, including energy, said John Ross, assistant general tax counsel at Chevron in San Francisco.
“This is not devastating, to be perfectly frank,” said Ross. “But you’re going to hear complaints from business.”
The energy industry’s financial problems, which deepened dramatically last winter with a 50% collapse in the price of crude oil, served to partially shield the industry from the severe tax treatment originally proposed by the Reagan Administration. However, repeal of the investment tax credit will tend to make it even less attractive to undertake costly exploration and drilling projects than it already is at today’s low oil prices.
And in the short term, the industry--especially the hard-hit independents and oil service firms--won’t benefit much from the reduced corporate tax rate of 34% because they are earning little or no income anyway.
“It’s a difficult time for the industry, and this adds to it,” said G. Henry M. Schuler, energy security expert at Georgetown University’s Center for Strategic and International Studies. “But it’s not as much of a burden as it would have been a year or 18 months ago. It sounds like (oil-state lawmakers) did a good job of preserving some much-needed drilling incentives.”
The major tax changes for oil and gas include an increase to seven years, from the current five, in the depreciation period for new equipment. The House had wanted to extend it to 10 years, and the industry had held out hope for an increase only to six years. The additional year was apparently one of the last concessions in the negotiations. Another change will see the major oil companies lose their deductions for 30% of so-called intangible drilling costs. Labor, materials and the actual cost of drilling have been treated as a fully deductible business expense.
Independent producers retain complete writeoffs of drilling costs as well as their percentage depletion allowance--a deduction of 15% of oil production revenue intended to offset the fact that the assets, or oil and gas, are being depleted as they are produced.
The oil and gas industry was also partly protected from the tax-shelter crackdown that repeals deductions for losses from investments in various industries. Investors with “working interests” in oil and gas ventures, as opposed to outside investors, can continue to deduct such losses.
