The current rules that favor oil companies by enabling them to rapidly write off drilling costs including labor, fuel and materials would be maintained under the president's tax simplification plan.
Oil industry analysts said yesterday that while they have not yet had an opportunity to study the details of the president's plan, they believe the proposed changes that apply specifically to the oil business would have little impact on major oil companies.
However, they said oil companies, and other corporations that rely heavily on expensive equipment, would be hurt by one feature of the president's plan. That feature would eliminate the investment tax credit, which has encouraged investment in equipment by offering significant tax benefits to corporations.
"I think the debate will center on whether it is wise as national policy to discourage investment in equipment," said Amoco Oil Co. chief economist Ted Eck. "It looks like the petroleum industry will have the same problem as other capital intensive industries by losing the investment tax credit, which contributed to cash flow. I don't see anything in this bill that would increase drilling activity. The real thing to keep in mind is that the petroleum industry is already going through a severe contraction."
The American Petroleum Institute said yesterday that elimination of tax benefits that have encouraged investment in oil drilling eqiupment would lead to a decline in oil exploration.
"We are concerned by any proposal which would increase the percentage of income which would go into taxes," API said. "The result would be less investment in exploration and development and therefore, less domestic production and higher imports. . . . We do feel strongly that any discouragement of investment in the search for oil and gas would be harmful to the nation's energy future and economic security."
Shearson Lehman Brothers oil analyst Sanford Margoshes said the president's proposal would aid small, independent oil drillers by retaining a tax benefit known as percentage depletion that would no longer be available to big oil companies. But he said that is no longer very important to major oil producers, who have done an effective job of lobbying since the Treasury Department announced the original tax reform proposal in November.
Under Treasury's original plan, current rules that favor big oil companies by offering them special tax savings for drilling costs such as labor and materials would have been eliminated.
Reagan's proposal said these breaks for oil companies should be maintained because, "The tax law has long been used to subsidize the exploration, development and production of natural resources. While subsidies for particular activites generally lead to inefficiencies and misdirect investment capital, the subsidies applied to natural resource development have also been important in maintaining a viable domestic energy industry."
If Reagan's plan had eliminated special tax benefits for "intangible" drilling costs such as labor and materials, it would have had a "delterious impact" on oil and gas exploration, Margoshes said. But since this important feature was maintained, he said, the impact of other rule changes on the economics of the oil industry is small.