The slippery slope of ‘subsidies’

Pete Sepp President, National Taxpayers Union
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On cue, President Obama has parlayed House Speaker John Boehner’s off-the-cuff remark with ABC News into an appeal for the administration’s tax hikes for oil and natural gas companies.

The brouhaha over the speaker’s words is the latest example of how so many members of the political class — as well as the media — have bought into the administration’s rhetoric about ending “subsidies” for the oil and gas industry. But as we’ve explained before, a major portion of the “taxpayer money” the president seeks from the oil and natural gas industry is not a subsidy. It is a provision in the tax code known as “dual capacity,” which enables the oil and natural gas companies operating overseas to avoid double taxation on income earned and taxed abroad. This well-established tax policy is meant to take the edge off an outdated U.S. corporate tax system that levies high rates and pursues income our firms earn abroad in a way that virtually no other developed country does.

Taking aim at oil and gas companies by removing dual capacity provisions, alongside Section 199 incentives (available to all manufacturers operating in the U.S. to promote job growth domestically), would eliminate 154,000 jobs and $341 billion in lost economic activity, according to a recent economic analysis.

Equally important, repeal of dual capacity provisions will not meaningfully reduce America’s ballooning national debt — it may actually work in the opposite direction. We recently argued that our government must shun tax hikes and focus instead on comprehensive spending restraint. Furthermore, oil and gas operations add nearly $100 million a day to federal coffers from mineral rights, corporate taxes, and other fees energy companies pay to our government. The president’s proposal to claw back what he calls tax preferences for oil and gas companies will raise the price of energy for all Americans by making the cost of production even higher than it already is.

In addition to not helping our debt, the attack on “big oil” with large tax hikes is also an attack on U.S. pensions. A new study from the Pew Center on the States has sounded the latest warning on the financial condition of state pension funds. The state government plans that pay pension and health-care benefits to retired teachers, correctional officers and other government workers face a cumulative shortfall of at least $1.26 trillion. And, depending on rate-of-return assumptions, the actual liability could be much worse. Here’s a prediction: “much worse” will be a lot likelier if higher taxes are slapped on American oil and natural gas companies, whose stocks have delivered healthy, reliable returns for millions of private- and public-sector retirees.

During the Obama presidency, Americans have seen a 100 percent increase in gas prices, much of which could have been avoided through a change in the administration’s market-manipulating energy policies (a fault, alas, many of his predecessors have shared). And here again, if those policies are allowed to continue unchecked, “much worse” is a term we’ll be learning all too well at the pump for the foreseeable future. The real “subsidy” at issue is rewarding politically favored “alternative energy” sources (and handing a competitive advantage to state-owned oil and gas firms abroad) by double-taxing American companies.

Maybe policymakers should clue in to some new words, like “honesty” and “reality.” That way we just might get a serious effort to simplify the tax code for all industries instead of attempts to use it as a weapon against politically convenient targets. Until then, the collateral damage from business-as-usual will continue to harm everyday Americans with high energy costs and lost economic opportunities.

Pete Sepp is Executive Vice President for the National Taxpayers Union.