our u.s. based companies. we want more u.s. based companies to be successful internationally. senator hatch, in relation to your comment overall, the tax rates you want to have to be as efficient and raise as much money as they can without doing harm. when we reduce capital gains and corporate dividends to 15%, we actually raised more money for the federal government. i'm very concerned about the cliff that's coming on cap gain, the rate in january 1 if the committee doesn't do something and congress doesn't do something it will go from 15 to 25. >> or higher. >> and on corporate dividends it goes from 15 to 44. 15 to 44. ordinary rate 49.3% and 3.8 on top of that for president obama's obama care and another 1.2 on elimination of pep. so you go from 15 to 44.6 and that's tripling the rate on corporate dividends for individuals and corporations

paid 35% and so this committee really needs to do some work and from your vantage point and from trying to raise money and if lower corporate gains rate raised money, if you took capital gains to go from 15 to 25, i'm afraid the government will not raise money. i'm afraid it will raise money and it will hurt real estate and banks that loan for real estate. >> you are talking to the choir here. >> just a comment i was around but not on the relevant committee in 1986 when the theory was popular for not using a code for social engineering. i think it's a good one if we can all subscribe to it and i don't know any faction in america that believes enough to act on it, i can't imagine this committee cannot be inundated with everybody, we already heard one appeal to why some critical

provision is necessary in the code. we are certainly a lot better off economically if we can get this simpler and if we can get the rates down and if we can get rid of the tax preferences and i think it's a pipe dream of some outsiders that think in this complex economy that any business organization, let alone the u.s. congress, can follow that. >> senator, nobody is talking about eliminating things like percentage depletion or the deductibility of expiration and development. what we're talking about is bringing those tax provisions into line with fundamental economics. that is what the concept of tax expenditures is all about. so we're not talking about getting rid of incentives. we're talking about making them neutral, which is your point, as i understand, mr. ranking member. secondly, as i emphasized in my written testimony and in my oral

remarks, 19% of the gdp is the revenue contribution to the federal budget seems to me to be a reasonable target. we're below that level now. we are at 17% or below. as i said, 17% is the number for the last real data we have. the congressional budget office has projected that for this year, this calendar year, that is, the number is going to be lower. so we need to have some kind of consensus. i'm talking about unanimity. i would like to see everybody subscribe to this, around a number like 19% is a starting point for our debate. but i agree with you entirely that we should have a neutral tax code. that is the purpose of comprehensive reform, as i see it. >> thank you, mr. hamm. make you the last one. >> i mentioned unintended consequences, you know, and the government's quest to raise more money, and equalize things.

i just want to caution that this tax could be one that vaporizes, you know, if idcs are taken away, that we stop the renaissance and still don't raise a lot of money. there's $4 billion, you know, drilling ceases or slows down considerably. you know, we've examined our company and, you know, absolutely a third less drilling would take place, you know, without the idcs. >> well, thank you all. >> thank you, senator conrad? >> thank you, mr. chairman. thank you for holding this hearing. thanks for the excellence of this panel. i remember very fondly serving with senator nickles. we've led the budget committee together for a number of years. one thing i learned about senator nickles is his word is absolutely gold, even when it's hard to keep his word, he did, which i always admired. congressman sharp, always good to serve with you, you're a thoughtful member.

dr. jorgenson, wise man. fortunate to have somebody of your quality and character before the committee. mr. hamm, thank you for what you've done for the country. thank you for what you've done for our state. i just want to point out what's happened to dependence on foreign energy. since 2005 we have gone down from 60% dependant to 45% dependant last year. we believe we'll be 42% dependant this year, so we have seen a dramatic reduction in our dependence on foreign energy. still, we are spending $1 billion a day to foreign sources, and it's incredibly important to the economics of the country we make further progress. let's go to the next slide and show what's happened to domestic production, and, again, i thank mr. hamm. thank you for making the investment. thank you for taking the risk. thank you for having faith that

what you and your people saw as an opportunity was worth pursuing because you've helped turn around our domestic production in a very dramatic way. and i believe it's entirely in our nation's interest, in the national security interest, in the national economic interest, and we've got to pursue it. that takes us to the question of incentives. mr. hamm, you have focused on intangible drilling costs. can you just tell us again why in your view that is so critical? you've testified here that if that were taken away in your company alone, you believe there would be a one-third reduction in drilling. is that -- is that what your people have concluded? >> it is. i'm not a tax accountant. you know, i'm an oil founder, but we do have a lot of tax accountants that work for us, that are on staff, and we've done a study on it, and that's been our consensus, that in our

company it eliminates about 34%, 35% of our drilling activity right off the bat. takes about seven years for us to get back to normal, some normal type operation. >> if that were taken away. >> yes. let me just say that, you know, i've served on the bowles/simpson commission, group of six, tried to be part of efforts to get us back on track because when you're borrowing 40 cents of every dollar, that cannot continue much longer, and we have got to get ahold of it. part of our issue, clearly, almost every bipartisan group that has looked at this has said that tax expenditures have got to be part of the solution because it's now $1.2 trillion a year. that's more being spent through the tax code than all of the appropriated accounts. so i personally believe we're

going to have to reduce tax expenditures, broaden the base. i personally believe we should lower rates in conjunction with that to help america be more competitive. we need to lower the corporate rate to be more competitive, but we also need to generate some more revenue to help with the deficit. on top of reforming entitlements, on top of cutting spending in the discretionary accounts, all of which is going to have to be done, none of which is very popular. but we've got to be careful we don't throw the baby out with the bath water. and what i hear you saying, mr. hamm, is that as you move towards these reform steps, first of all, don't throw out intangible drilling because that would have unintended consequences. is that what you're trying to tell us here? >> that's correct. again, i'm not a tax accountant, but, you know, we've done our study. you know, we have provisions right now that encourage us to invest, and we need to invest

heavily in the bakken. for instance, right now we estimate there's 900 billion barrels of oil in place, in this whole petroleum system. >> 900 billion barrels. >> 900 billion. right now we think we can get 2% to 3% of that, 2.5% maybe, or something like that. if we could move that needle up to 5%, everybody here can do the math. i mean, we're talking doubling, you know, our reserves in america so it's that significant, so, you know, we've got a job to do and a very significant one, and we need the ability to do it. this gives -- this encourages us to do it. >> just the last statement, if i could, mr. chairman. i've just been up with secretary salazar on several of the wells being drilled in north dakota, and i'll tell you it's extremely

impressive. it's being carefully done. it's being professionally done. it's being done in an environmentally sensitive way. it's being done with extraordinary technology, and so we thank you for that as well. it's being done in -- i'll tell you, i don't think any one of us would go there and not come away impressed with the professionalism of how it's being conducted. >> thank you, senator. i agree. in fact, a guy took me up one of the rigs in montana, the same person that took you and secretary salazar up to the rigging in north dakota. if you can answer in one sentence, what does it take to move that needle up to 5%? what's a one-sentence answer of what it takes to move the needle up to 5%? >> i think it can be done over time. you know, there's a lot of things. we have to figure out the next step of enhanced oil recovery. that will play a big factor. with that co2, you know, just normal secondary water flooding or whatever it is, i mean, we've got to do that. >> okay.

thanks a lot. senator grassley. >> as we begin to consider what comprehensive tax reform would look like, it's important to discuss goals, objectives other than revenue collection, what the tax code should accomplish. we had testimony before our committee december 2011 from -- on incentives for alternative energy. miss sherlock of crs notes, quote, the income tax code has long been used as a policy tool for promoting u.s. energy priorities, end of quote, so it makes sense to consider whether or not our tax code of the future should further energy priorities. those who want to isolate federal tax incentives for alternative energy and put them on a chopping block need to remember that the oil and gas industries have received massive permanent tax breaks for 100 years, an contrast tax incentives for alternative energy have existed only a few decades, and have always been temporary.

these incentives first appeared in the '70s in direct response to oil crisis, and they helped to level the playing field for renewable resources. these incentives reduce the cost of capital investment for these fledgling industries that are not yet able to raise capital. any argument made for eliminating renewable energy tax incentives is intellectually dishonest if it doesn't include a review of all energy tax incentives. those opposed to incentives for alternative energy often fail to consider that a key reason to support renewable energy resources should be energy independence. the united states spends more than $400 billion each year importing oil. now more than ever the united states needs to ramp up domestic production of traditional energy, including oil and natural gas, coal and expand alternative fuels and renewable energies, including all of them, and i won't name them because you know them. american imports almost 50%, i think it's a little bit less

than 50% now of our oil. the u.s. treasury pays out an average of $84 billion a year to defend shipping lanes, to bring that oil here. these costs are never included in the discussion of cost effectiveness of tax incentives for oil and gas as compared to alternative energy. for sure we need a tax system that is less complicated, fairer and will make more competitive, us more competitive in the global economy. however, there is a long history using the tax code to promote energy policy starting with intangible drilling costs and percentage depletion provisions that are almost 100 years old. experts in favor of these provisions argue that these provisions are not tax expenditures because they just represent ordinary business expenses and are similar to research and development. yet, the expensing of research and development costs and intangible drilling costs are exceptions to the rule that such expenses should be capitalized

and deducted over years. it seems the primary benefit of the intangible drilling costs provisions is that it provides more cash for additional drilling operations, which results in more jobs. retaining this provision then would seem to indicate that the tax code should play a role in our energy. so to senator nickles and mr. hamm, does this conflict with the key objectives of tax reform to lower the rates and broaden the base? wouldn't lower tax rates also provide more cash for additional exploring and drilling, and also if the r & d and accelerated depletion provisions are reviewed in the complex tax reform, do you agree that intangible drilling costs and percentage of depletion provision should also be reviewed? >> senator grassley, you haven't changed a bit. i remember having this debate for about the last 30 years. a couple of comments. one, intangible drilling costs is expensing out-of-pocket

business expense. that's wages. you compared it to r & d. r & d is a credit. there's a big difference. r & d credit is dollar for dollar off your income tax, and the other one is a deduction for an out-of-pocket expense wages. and i mentioned earlier before you arrived, i think for tax simplicity you should allow every business to be able to expense certainly its wages, so i -- i don't compare the two. i'm all in favor of putting basically everything on the table. it's exciting to think what you all are getting ready to do in very significant tax reform, and you should put everything on the table, but if -- if you don't allow industries to expense their out-of-pocket expenses as harold hamm said, you're going to have some real negative consequences. you won't have $2 gas. i don't think this committee or

congress wants to do something that's going to have an adverse economic impact. this happens to be the shale gas revolution as well as the oil revolution is one of the best things that's happened in this country economically in years. congress doesn't want to mess it up. but i think you ought to look at every credit because that is -- any credit is by nature, it's congress saying we think that this is even more valuable than the dollar you spend. you spend $1 and we're going to reduce your taxes by a dollar, so i'm all in favor of putting a lot of credits and deductions and tax-exempts. we've go the a lot of tax-exempts that aren't taxed. tax everything once. you broaden the scope a bunch by doing so. >> mr. hamm? >> i agree. we capitalize, all the hardware out there, we capitalize that. we do write off the wages. in regard to drilling and, you know, the deductibles in that regard, and it is a provision

that encourages new exploration, and we need to look at down the road what's going to happen down the road? right now we're using 91 million barrels of oil per day. here in the u.s. we're producing about 10%. if you add to the chart the petroleum liquids to that chart, we're at about 9 million barrels a day, so we're producing about 10% of our petroleum needs today, and that's estimated to be going up by 2035, 30% more to 112 million barrels. if we're going to produce our part of that in the future, we're going to have to have incentives like we have in place to do that. >> thank you, senator. senator bingaman. >> thank you all for being here, and first i congratulate mr. hamm and all those in the industry who have been so

successful at increasing production. i think it is a good thing for our economy. obviously it's strengthening our economy. i've always thought that there are three primary goals that we have as a country with regard to energy. one is we want to have an ample supply at reasonable cost. second, we want to have diverse sources of energy so that we're not dependent upon any one source, and, third, we want to have energy policy that does the least damage to the environment, does the least damage to the health of the citizenry, and so those are the three goals that we've got out there. now, on -- on tax expenditures, i know there's a lot of talk about reducing tax expenditures and the strong arguments have been made as to why those that relate to the oil and gas industry, at least the intangible drilling costs, ought to be maintained.

i gather though, senator nickles' view is we ought to repeal section 199 for everybody, not just for the oil and gas industry. >> i would think you -- when you're doing corporate reform, having a uniform corporate rate, not a lower rate for manufacturers, would make sense. that's what i argued when i was on the committee, and i haven't changed my position. >> yeah. one of the -- one of the things that's -- that's complicated our discussion of energy tax expenditures is that we have some that were adopted prior to the budget act of 1974, and we have others that have been adopted since the budget act, and by and large those that were adopted prior to the budget act, which relate to the oil and gas industry are permanent parts of the tax code. those that have been adopted

since the budget act are very limited in time in most cases, and they keep expiring, and those that relate to renewable energy have expired and come back and then we put them in place again, and then we let them expire again. i'd just be interested in the panel's view as to whether whatever we do with these tax expenditures, would it make good sense, it seems to me it would make good sense, to put them all on an equal playing field in terms of their permanence, and whatever we decide makes sense for the wind energy credit, some production of the tax credit ought to be part of our tax code, then we ought to put it in place and leave it there for a while. just as the intangible drilling cost provisions relate to oil and gas production are a permanent part of the tax code. dr. jorgenson, did you have a thought on any of that?

>> well, as i said in response to chairman baucus, i think we need to focus on the environmental issues that really count, senator, and those issues have to do with the utilization of energy. they don't have to do with energy technology. there's something that hasn't been mentioned that i think we need to focus on. senator baucus i think alluded to this, but let's put it front and center. in december 1998, i'm reading from a publication of the energy information administration, the cost of a barrel of oil in cushing, oklahoma, this is west texas intermediate, the spot price f.o.b. was $11.35. in april of this year, which is the last year for which we have data, april of 2012, that number was $103.32, seven times greater.

we have had an energy price crisis. you're all familiar with that. everybody here has lived through this. that peaked with the price of june 2008. again, cushing, oklahoma, west texas intermediate, of $133.88. now what is the difference between this experience and our previous experience? these prices have not declined in '73 it was followed by a price collapse, in '79 it was followed by a price collapse, in '81 it was followed by a price collapse. this has not happened. something has changed in the world petroleum markets. these prices are permanently higher. this is the basis for the incentives that are driving the bakken. you can talk all you like about tax incentives and i'm not against treating these

symmetrically with every other form of production. i'm talking about oil and natural gas, but the point is that once you do treat them symmetrically, you've got to reckon with the fact that we've seen a sea change in the world petroleum market. we have prices that are seven times as high as they were as recently as 1988. that is the most relevant fact about incentives that we're here to discuss. >> can i respond? >> go right ahead. >> sure. >> dr. jorgenson picked the lowest year in history almost. in 1998, if anybody here remembers that, is when our friends from venezuela was dumping oil into america, trying to put all the stripper producers particularly, high-cost producers in america out of business.

the price before that had been in the $20 range, twice that, after, that you know, they responded and came back to that, after that procedure was changed, and the administration was changed in venezuela, so that -- that's how that happened. when the bakken began up there in early 2000, the price of oil was about $25 a barrel, so, yes, we've seen prices spike at $147 for one day, and then they came back, so right now we're, you know, at about an $80 price range, close to that. we're about $15 under branch price, which is considered to be world price here in the midwest, so prices go up and they go down. >> thank you, mr. hamm. >> senator coburn. >> thank you, mr. chairman, and thanks to the individuals testifying.

i'm having trouble getting this. senator enzi and i are the only two accountants on this committee, and the thing that i can't figure out is what we -- what the obvious is not being seen. you eliminate intangible drilling costs, actually you decrease revenue to the federal government and here's why. you take away the capital for exploration. you thereby decrease the amount of revenues and the exploration in this country. if you -- if you had no change in exploration and no change in discoveries, the tax revenue to the federal government would be the same over ten years as it is with intangible drilling costs. there's no difference to what the government takes in. one is a delayed tax versus a fully captured tax at the time of the expensing, so i don't get what the debate is. what i don't understand is why when we're sending $400 billion a year out of this country and we have the potential to have a

stimulus in this country of $400 billion a year by having the money that would have been sent out spent here tax-free, not borrowed to create a stimulus, totally tax-free and energy independence for our country, why wouldn't we do everything we can to do that, still within the parameters that dr. jorgenson set out in terms of the clean environment? i don't get it. we have the opportunity of a lifetime in this country to reinvigorate this country in terms of natural gas and propane and ethane. we're building new cracking plants. conoco is going to do another one. they are employing 10,000 people in texas right now to build a big cracking plant. it's going to put us at a major advantage over everybody in the world in terms of raw materials from almost everything that's made in this country, from plastics, to chemicals, to you name it. we have an opportunity to expand

our dominance in the world as manufacturers on the basis of what has happened in oil and gas exploration, and when we talk so foolishly about short little bitty things, not looking at the big picture, i have trouble understanding that. there's no question there will be no increase in revenue to the federal government by eliminating intangible drilling costs, no net revenue increase to the federal government because you're going to shut down a third of the exploration. and, by the way, they just -- they just pay out $100 billion a year. oil and gas industry is the largest payer to the federal government in terms of taxes that there is today. they pay on average 9% more against earnings than any other industry in the country, and now we're talking about lessening that, but more importantly we're talking about stealing the one thing that can renew america's dominance in terms of productivity and in terms of manufacturing edge. what has happened in the oil and gas industry is giving us an

opportunity to regain our mojo. we must be very careful in how we approach this. amortization is something that my colleagues need to learn about, what it means in terms of the accounting rule. under generally accepted accounting principles we amortize expenses. what we have done with intangible drilling costs have said we're not going to amortize those. we're going to allow those to be written off, just like we did with 100% write-off that we gave in terms of new investments last year, and what has come about from that? what has come about from that is a tremendous increase in jobs, but more importantly a dynamite opportunity for this country to get back to where it was 20 years ago in terms of leading the world, in terms of production, innovation and efficiency. we should be careful.

i have one question for dr. jorgenson. if we had $400 billion in stimulus every year coming into this country that was not borrowed money and not directed by the federal government but was in the market, what would be the net effect to our economy? >> senator coburn, you're going to be very surprised to hear this answer because i'm going to agree with everything you said. this is not a debate about tax expenditures. that is second order. let's get the big picture in mind. we're not talking about big revenue here. these expenditures have been limited for years to the independents. that's what mr. hamm discussed with us in his written testimony, so i think we are all