General THOMPSON. And I have a study entitled "Tax Policy and Petroleum Supplies-The History, Basic Philosophy and Equity of Percentage Depletion and the Expensing of Intangible Drilling Costs as Applied to Oil and Gas Production" by Hines H. Baker, a classmate of mine in law school at the university, which is a thorough study and which I would like to submit for the consideration of the committee. The CHAIRMAN. How many pages? General THOMPSON. Twenty-three pages. The CHAIRMAN. Without objection it may be made a part of the record. (The document referred to is as follows:) TAX POLICY AND PETROLEUM SUPPLIES THE HISTORY, BASIC PHILOSOPHY AND EQUITY OF PERCENTAGE DEPLETION AND THE EXPENSING OF INTANGIBLE DRILLING COSTS AS APPLIED TO OIL AND GAS PRODUCTION (By Hines H. Bakes, president, Humble Oil & Refining Co.) (An address before a division production group session, annual meeting of the American Petroleum Institute, Los Angeles, Calif., November 15, 1950) INTRODUCTION This analysis and discussion deals with the basic principles and philosophy underlying the income-tax provisions applicable to petroleum production, and with the practical considerations involved in a sound taxing policy that will induce the risk of the billions of dollars of capital that must be spent annually' to discover and develop the petroleum supplies required for our economy and for national defense. The analysis is not intended to be a technical treatment of the subject. Such technical treatment would involve many details best left for discussion by tax experts, lawyers, and accountants. IMPORTANCE OF PETROLEUM SUPPLIES Oil and gas are more essential to the United States today than ever before. They have now become our principal source of energy. Ample supplies of these fuels are indispensable for national security as well as for economic progress. Oil and gas are major factors in our rising standard of living. We use and need great quantities of energy provided by oil and gas for industry, for transportation, for agriculture, and for the home. Our industrial civilization depends on the continued adequacy of petroleum supplies, particularly for transportation. Will we continue to have enough oil and gas for national security and economie progress in the years ahead? There are many technological and economic factors which must be weighed in arriving at a reasonable answer to that question, In my opinion, the United States will continue to have the oil and gas it needs for the foreseeable future provided that there is no interference with satisfactory economic incentives in the search for new petroleum reserves. The existence of reasonable economic incentives will bring about the huge investment of capital necessary to continue the exploration, development, and technological advances / which make it possible to provide sufficient oil and gas for an expanding economy, In the absence of reasonable incentives, supplies of oil and gas will be affected adversely and our standards of living and national security will suffer correspondingly. Recent developments emphasize the need for consideration of the impact of tax policy on petroleum supplies. The trend toward higher income taxes reduces the incentive and opportunity to make new investments in productive facilities for all business. It will, therefore, influence exploration and development of new petroleum resources. That risk the oil industry shares in common with other business activities. In addition, however, the pressure on the Government to raise more revenue has lead to dangerous proposals for changes in the tax structure which would strike a direct blow against future domestic petroleum supplies. The changes proposed early this year in the maximum rate of depletion from 27.5 to 15 percent on the value of production would have cut virtually in half the rate which has been recognized since 1926 as necessary to provide fair treatment for this hazardous business and to encourage the further venture of risk capital in the search for new reserves. Another proposal would cut depletion still further by allowing it to apply only after gross income equaled the intangible development costs rather than over the full producing life of a property. These proposals would inevitably result in reduced exploration, smaller supplies of petroleum, and higher prices for petroleum products, all of which would hurt national security and handicap further economic progress. Abundant supplies of oil and gas have been of tremendous benefit to all of us by providing low-cost transportation, machines to increase production while hours of work are reduced, and all the comforts of convenient and clean heat and power in our homes. Furthermore, they have been enormously valuable to the United States in time of war. In World War II, for example, petroleum products for ships, planes, tanks, trucks, and other equipment carried our fighting forces to victory, with a saving of immeasurable value in lives, time, and money. |