The partial federal government shutdown earlier last fall was an inconvenience for some Americans, but it remains a more painful, lasting reminder in our nation’s capital. With popularity ratings only marginally higher than poison ivy, elected officials decided to make a deal before leaving town last year. They filled in some short-term details of this agreement last month through an “omnibus” spending bill.
Both moves will on balance be bad news for taxpayers, because they override modest but effective bipartisan caps on federal spending. This leaves the question, however, of where will leaders turn next on fiscal policy? While comprehensive tax reform is badly needed, some leaders would prefer to target specific industries, like oil and gas, with massive tax hikes. That would be a mistake.
Meanwhile, according to a report issued by the White House, the federal government will begin publishing annual reports on its “spending on fossil fuel subsidies” as part of “an effort to increase transparency and accountability.” This is truly a supreme irony – the administration’s political motives are the most transparent, while its policymaking is hardly accountable.
For one, the U.S. oil and natural gas industry does not receive some multi-billion-dollar stream of taxpayer-subsidized payments. Rather, it utilizes the same tax credits and deductions that are available to many variously sized American companies. The U.S. Tax Code contains these elements to take a bit of the pain away from one of the worst corporate tax regimes in the world. The domestic production activities deduction, used by corporations such as GE and Apple, ensures that businesses receive some relief for providing well-paying jobs.
In addition, a foreign tax credit prevents American companies from getting taxed twice on their energy production. Getting rid of that provision, as the Obama administration wishes, would put U.S. energy companies at a disadvantage to foreign firms, many of which are state-owned.
Attempts to equate deductions and credits like these with the direct handout of taxpayer dollars, as was the case in the recent Solyndra solar energy company scandal, is pure Washington-speak. Even a Washington Post fact check column pointed out that there’s an important difference.
It’s hard to argue energy gets special treatment. In fact, between 2007 and 2012, the industry had an average effective tax rate of 37 percent. To put this in perspective, the tax load for companies across the entire S&P index was 29 percent. Furthermore, even though oil and gas firms report large profits measured in dollars, the margin they get to keep as a percentage of total receipts is much lower than many other industries due to the high cost of investment.
Those who doubt that massive new oil and gas taxes could be on the table in 2014 need look no further than the budget President Obama submitted to Congress last year. It selectively barred oil and gas from certain corporate tax provisions which, again, are available in various forms to numerous industries.
On paper, soaking energy companies must seem like a tempting quick fix for a Congress reluctant to curb its spending habits. But according to a 2011 analysis conducted for the American Petroleum Institute by the respected analytical firm Wood Mackenzie, increased taxes on the oil and gas industry could cost billions in lost tax revenue. Such a move could also kill some 170,000 direct and indirect jobs by 2014 and reduce domestic production by 700,000 barrels per day.
Real reform that lowers tax rates in exchange for taking away deductions or credits broadly is a worthwhile goal, but singling out specific industries is a recipe for economic disaster and makes the tax code even more complicated.