Democrats Look to Roll Back Tax Breaks for Oil Cos.

House Democrats in the first weeks of the new Congress plan to establish a dedicated fund to promote renewable energy and conservation, using money from oil companies.

That's only one legislative hit the oil industry is expected to take next year as a Congress run by Democrats is likely to show little sympathy to the cash-rich, high-profile business.

Whether the issue is rolling tax breaks — some approved by Congress only 18 months ago — pushing for more use of ethanol and other biofuels instead of gasoline, or investigations into shortfalls in royalty payments to the government, oil industry lobbyists will spend most of their time playing defense.

Details of a renewable fuels fund have yet to be worked out. Nonetheless, it's one of the initiatives the House will take up during its first 100 hours in session in January, according to aides to Speaker-elect Nancy Pelosi. At least some of the money — revenue gained by rolling back some tax breaks — will go to a program to support research into making ethanol from sources other than corn.

"What we'll do is roll back the subsidies to Big Oil and use the resources to invest in a reserve for research in alternative energy," Pelosi, a California Democrat, recently told reporters.

But the oil issue likely to be first out of the legislative block in January concerns the ability of the federal government to recover royalties many lawmakers believe have been unfairly avoided by oil and gas companies drilling in deep waters of the Gulf of Mexico.

The Interior Department has been trying to get more than 50 companies to rework 1998-99 drilling leases that allow the companies to avoid paying billions of dollars in royalties because of a government mistake in writing the leases. Recently five companies agreed to a compromise to pay royalties on future production under the leases, but not from oil and gas already taken from the federal waters.

Most of the other companies argue that the leases represent a binding contract and have not even talked to Interior officials about them.

The industry intransigence has upset many in Congress, both Republicans and Democrats, who say they want to find a way to force the companies back to negotiations on the flawed leases. One approach is legislation barring companies from bidding on future leases unless they agree to renegotiate the flawed ones.

"There will be a new cop on the beat to force every big oil company that is currently lining its pockets with taxpayer dollars to come back to the negotiating table," Rep. Edward Markey, D-Mass., declared.

Pelosi calls the royalty avoidance from the 1998-99 leases the biggest oil industry subsidy issue she intends to tackle early. Congressional estimates have put the potential royalty loss at as much as $10 billion over the life of the leases.

Rep. Henry Waxman, D-Calif., the incoming chairman of the House Government Reform Committee, has promised to continue pressing the Interior Department on the matter, which also has been the subject of extensive hearings under GOP leadership.

Recently Waxman and Rep. Tom Davis, R-Va., the committee's departing chairman, asked the Justice Department to review Interior's claim that royalties legally cannot be collected from past production under the leases.

House Democrats also are targeting a handful of oil industry tax breaks for repeal. Both Republican and Democratic lawmakers say there is unlikely to be an attempt to push more sweeping measures such a new tax on the oil industry's windfall profits.

Members of both parties have said they also want to make another stab at passing a federal law against oil company price gouging, an issue that will gain momentum should oil and gasoline prices again soar amid huge industry profits.

At the top of the hit list is a tax break that was aimed at promoting U.S. manufacturing but has provided a windfall for the oil industry as well. The provision reduces the corporate tax rate on profits from products made in the United States.

As for oil companies rolling in profits with $60-a-barrel crude, it is "a break they didn't earn, deserve or need," says Rep. Jim McDermott, D-Wash. McDermott tried to eliminate the tax break in May but was unsuccessful. He estimates that oil companies are saving as much as $700 million in taxes a year because of it.

Democrats also are targeting other benefits for refinery investments and for expenditures for certain types of oil and gas exploration. Those measures, passed by Congress last year as part of a broad energy bill, are estimated to cost the government about $1.3 billion over 10 years.

Executives of the largest oil companies have said they don't need those tax breaks and do not oppose their repeal. Congress earlier this year already eliminated the tax incentive on exploration for the five largest companies.

Oil lobbyists, however, are preparing to fight another proposal that would raise taxes on their inventories, a change that could cost oil companies billions of dollars. The inventory tax provisions cover the entire industry and some lawmakers want to repeal them only for the biggest companies.

"That would significantly raise the cost of holding inventory" and cause companies to reduce the amount of oil they keep in storage, said Red Cavaney, president of the American Petroleum Institute, the industry trade group. If that happens "prices will go through the roof" if there is even a modest disruption, he predicted.

The White House is not opposed to rolling back some of the tax breaks that Congress approved last year. President Bush has said the industry doesn't need the subsidies given today's oil prices and industry profits.

But the administration is opposed to tinkering with some of the other tax rollbacks under consideration including the one on inventory taxes. The Interior Department also has said it wants to work with Congress to find ways to deal with the royalty issue, but is worried the proposal to bar companies from future leases could throw the federal offshore leasing program into lengthy litigation.

"Our fear is our (leasing) program would shut down. That would have a multibillion-dollar impact on federal revenues," Assistant Interior Secretary Stephen Allred recently told reporters.

Oil industry lobbyists also expect a Democratic push to further expand production of ethanol as a gasoline additive and don't see that as a threat to their business. A more contentious issue will be attempts to require large oil companies to make available fuel that is 85 percent ethanol, so-called E-85, at some of their retail outlets.