Oil business seen in strong position as
Trump tackles tax reform
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[January 03, 2017]
By David Morgan
WASHINGTON (Reuters) - Big Oil could be in
a unique position to protect its interests against a Republican proposal
to tax imports, given that President-elect Donald Trump's cabinet is
studded with oil champions sensitive to the risk of higher gasoline
Trump's emerging leadership includes Exxon Mobil Corp <XOM.N> Chief
Executive Officer Rex Tillerson as secretary of state, former Texas
Governor Rick Perry as energy secretary and Oklahoma Attorney General
Scott Pruitt as Environmental Protection Agency administrator.
Trump himself has made no secret of his support for the energy sector.
And in Congress, both Republicans and Democrats have close industry
ties, including House tax panel chairman Kevin Brady, a Texas Republican
whose district takes in the northern Houston suburbs.
House Republicans want to adopt a sweeping tax reform that would sharply
reduce tax rates for corporations and end the taxation of U.S. corporate
But a provision known as border adjustability is stirring up
controversy. Though intended to boost U.S. manufacturing by exempting
export revenues from tax, the provision worries some industries because
it would also tax imports.
Because U.S. oil refiners import about half the crude oil they use to
make gasoline, diesel and other products, analysts say the change could
lead to higher gasoline prices and potentially undermine economic
Integrated oil companies such as Exxon, Chevron Corp <CVX.N>, BP Plc
<BP.L>, Royal Dutch Shell Plc <RDSa.L> and ConocoPhillips <COP.N> could
also be hit, depending on whether they are net importers.
But the industry's allies would likely move to soften any rough edges,
"I don't see this mix of leadership figures in the House, Senate and the
White House, doing something that has the effect of raising gasoline
prices," said Peter Cohn, an energy analyst with Height Securities, a
Washington-based investment firm.
The danger is that a move to protect the oil refiners could open the
door to assistance for other industries, including retailers and
automakers, which would also face higher costs if no longer able to
deduct the cost of imports from their taxable income.
Such a knock-on effect could prevent border adjustability from raising
an expected $1 trillion in revenues to help pay for lower tax rates over
the next decade.
"We hope that raising these concerns early in the process will allow
members of Congress to consider the issues carefully," Chet Thompson,
president of the American Fuel and Petrochemical Manufacturers trade
group, said in a statement.
Brady said earlier this month that his committee was sensitive to the
impact on specific businesses and "listening very closely to how we can
make sure we smooth that out."
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ExxonMobil Chairman and CEO Rex Tillerson speaks during the IHS
CERAWeek 2015 energy conference in Houston, Texas April 21, 2015.
REUTERS/Daniel Kramer/File Photo
Moreover, some economists dismiss industry worries about higher
import costs, saying the dollar's value would rise in response to
such sweeping tax changes and ultimately reduce the cost of imports.
Currency markets would adjust to higher oil prices by lowering the
dollar value of crude, they predict.
"This argument by the oil industry is, frankly, all wrong," said
Douglas Holtz-Eakin, former director of the nonpartisan
Congressional Budget Office, who now heads the American Action Forum
"Refiners are going to be basically held harmless. They'll have a
lower dollar price of oil. Net cost is the same. And they go about
their business. I'm unsympathetic,” he added.
Height Securities' Cohn said Trump and his advisers could look for
ways to soften any blow to refiners and their customers: "Trump
doesn't want to have refineries closing on his watch."
Oil already benefits from several tax code provisions in place for
decades that would be eliminated under the House Republican plan.
But they stand to gain more than they will lose.
For instance, an existing tax deduction for domestic production lets
oil producers shave down their corporate tax rate to 32 percent from
the top headline rate of 35 percent. Under the congressional
Republicans' plan, the corporate rate would be cut to 20 percent;
under Trump's plan, to 15 percent.
Similarly, companies that now write off intangible drilling costs or
get a tax allowance for asset depletion would be able to immediately
expense capital investments.
Then there is a tax credit oil companies claim for fees from foreign
countries. Congressional Republicans would eliminate foreign taxes
altogether, while Trump would maintain taxation at a substantially
(Editing by Kevin Drawbaugh and Lisa Shumaker)
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