Energy, Mistruths and Tax Reform

House Speaker Paul Ryan (R-Wis.) — America’s best-known tax policy wonk — delivered a speech in June to the National Association of Manufacturers in which he addressed the need for comprehensive tax reform, problems with the current tax code, its impact on U.S. manufacturers and a vision for enacting true reform. He concluded, “we are going to get this done in 2017.”

Encouraging words; but to get this generational moment right, lawmakers must adopt sound economic policy rather than resort to empty political rhetoric.

The last such tax reform was in 1986; Ronald Reagan was in office and a gallon of gas cost less than a dollar. Now, Republicans hold both chambers of Congress and the White House; they cannot let this opportunity go to waste. The tax code is long overdue for reform: the U.S. has among the highest corporate tax rates in the developed world (39 percent); it adds state taxes that increase the federal corporate tax rate; it relies on “worldwide” taxes that subject U.S. companies to double taxation on overseas earnings though their competitors suffer no such handicap. These issues seriously handicap American companies and cry out for permanent reform.

But recently, 16 Democratic House lawmakers wrote to House Ways and Means Chair Kevin Brady (R-Texas) and Ranking Minority Member Richard Neal (D-Mass.), to call for “an end to special interest tax breaks provided to the oil and gas industry.” The ignorance and misstatement of tax facts were amazing and shameless.

Nonpartisan Congressional Research Service analysis (that the 16 House Democrats could have read), shows total tax provisions used by the energy sector totaled $17.3 Billion in 2016. Of that amount, oil and gas companies accounted for $2.8 Billion (16 percent) while renewable companies accounted for $14.5 Billion (84 percent). Fossil-fuel critics keep misleading about valid tax deductions by oil and gas companies, calling them “subsidies” or “breaks.” Let’s see.

The tax provisions are legitimate deductions for research and development and labor costs for all foreign and domestic, energy and non-energy companies. U.S. tax provisions enable an individual or company that invests in oil or gas drilling to deduct “intangible expenses” — labor and site preparations that produce no direct physical asset. Renewables, on the other hand, rake in huge site prep subsidies under special provisions in the current tax code, while they produce 90 percent less energy than is produced by fossil fuels.

Supporters argue that green fuels only need subsidies until their costs fall, but they have collected them for decades. Energy Information Administration data for fiscal year 2013 show that, on a per-megawatt-hour basis, solar received $231 of support; wind received $35. Natural gas and oil together received a whopping $0.67. Yet these House lawmakers continue to misuse the terms “subsidies,” “breaks” and “giveaways.”

Let’s think for a moment about subsidies and who gets them. In the Energy Policy Act of 2005, Congress gave a federal tax credit for residential properties using solar electric and solar water systems, as well as for fuel cells. In 2008, the credits were extended to include small wind and geothermal systems.

Then, in 2011 alone, 1,000 separate state legislative bills passed, enabling loans, bonds, rebates and creation of financing authorities to enable such subsidies. The new laws added tax incentives in 17 states for solar, wind and other alternate energy sources. Illinois, Virginia, and Oregon began grants for clean energy projects.

Other laws dictated land use, location and ownership of real estate to earn royalties. Still others added subsidies for self-generation of electricity. Hybrid auto (electric/gasoline) were heavily subsidized for years, and Tesla autos all “earn” $7,500 subsidies for their new owners. Most of the laws provide both mandates for use of renewable energy throughout the state, and tax subsidies for residence, land owners, auto owners and others who led the way in their use of renewable fuels.

Fortunately, Trump administration officials seem to recognize the pitfalls, though the House Democrats apparently do not. Energy Secretary Rick Perry, when asked about the developing tax plan, said, “I don’t think the administration is going to be wildly supportive of government subsidies for sectors of the energy industry.” The administration and Congress should follow through on this idea and avoid paying favorites in the energy sector with tax policy.

As the details of comprehensive tax reform are worked out, they should focus first on creating a more level playing economic playing field for all potential outcomes. If the lawmakers treat all sides equally across the energy sector, the result would encourage competition and growth among many diverse segments of the economy.

Speaker Ryan expressed a sense of urgency in favor of passing permanent, comprehensive tax reform. The administration and both chambers of Congress must prioritize this promising opportunity. We cannot afford to play politics nor to wait another 30 years.

Jack Rafuse heads the Rafuse Organizatoin, an independent consultancy on energy, trade and security issues. He was an energy adviser for the Nixon administration.

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