Beware of tax reform ‘deal’ that relies on new energy taxes

Pete Sepp President, National Taxpayers Union
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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.

Fortunately for policymakers, research suggests that oil and gas dollars can have an effective role in extricating the federal government from its budget morass – providing they go about it in sensible ways. Opening federal land to energy production — currently closed off because of statutory or administrative action — would be an economic boost. Such job-creating, profit-generating activity would lead to $24 billion in new federal revenue annually over the first seven years, and $86 billion annually thereafter, a study conducted for the Institute for Energy Research by LSU economist Joseph R. Mason concluded.

Taxpayers wound up with a losing hand the last time Congress made a deal over budget policy. Now that the deck is being shuffled again, Washington should avoid politically convenient taxes on energy producers, and instead embrace a simpler tax code for everyone as well as an honest reckoning with out-of-control spending. Otherwise, politicians will only compound the problems that have brought the nation to the brink of fiscal ruin.

Pete Sepp is Executive Vice President of the 362,000-member National Taxpayers Union, a non-partisan citizen group founded in 1969 to work for lower taxes and limited government.