Whether or not some or all of the Trump Administration’s proposed tax plan will be instated remains to be seen (and markets continue to hold their breath). Trump plans to visit Capitol Hill this week to speak with House GOP re: the proposed tax bill. For now, we can look at the first draft of the bill, which was released last week, and gather what it would mean for some sections of the energy sector. In short, the proposal favors the oil and gas industry rather than alternatives, which isn’t surprising given Trump’s clear favor of fossil fuels.
Oil and Gas (Companies and Their Investors)
The proposed overhaul would fare well for oil and gas companies, which would likely result in further exploration and production domestically. This is one reason experts are estimating the U.S. will lead the oil industry in fewer than 10 years. The plan to slash the corporate rate from 35% to 20% would be a positive for companies across the board, and especially pleasing to companies in oil and gas. The proposal outlines three other changes/preservations that benefit oil and gas:
- The bill would protect attractive deductions for the costs associated with drilling, which can greatly benefit investors who directly invest in domestic oil drilling projects.
- The bill would also protect the ability for exploration companies to “reduce taxable income to reflect the depreciation of reserves” (1).
- The bill would preserve LIFO, aka last-in-first-out. These LIFO accounting rules allow companies to “value crude stockpiles at the price they’re selling for, rather than the original purchase cost” (2).
This area is pretty cut and dry in the proposed legislation: No more $7,500 tax credit for purchasers of electric cars. While the U.S. as well as countries around the world have made significant pushes toward electric cars, the proposed tax plan would eliminate the substantial tax credit currently enjoyed by those who buy electric cars. Whether or not this tax incentive is currently driving people to make their car-buying decisions remains to be seen (should the bill pass and the credit be stripped).
Wind and Solar
While the proposed plan adds incentives in the areas of renewable energies, it also outlines negative changes. The plan would maintain the tax credit for solar, but slash the wind tax credit by one third (3). On a more positive note for renewables, the bill extends an estimated $6 billion credit to the nuclear industry while also adding smaller (much smaller) incentives for geothermal, small-scale wind and fuel cell projects.
For more details on the points mentioned in this article as well as the impact on other industries, see this complete breakdown published by Bloomberg.
1 and 2. See here.
3. See here.