Muddling the Tax Reform Debate

Last week, Presidential candidates Hillary Clinton and Donald Trump both traveled to Michigan within days of each other to give major economic policy speeches. With the economy continuing to falter — recent Commerce Department numbers show a paltry 1.2 percent growth the last quarter — Americans were eager to hear the candidates’ proposals on how to get the nation back on the right economic path.

Discussion of economic policy inevitably involves a discussion on addressing tax policy and implementing tax reform. It’s also inevitable that tax reform discussion leads us to a persistent myth which continues to rear its ugly head despite evidence to the contrary — that America’s oil and natural gas companies receive subsidies from the government.

Two recent items in the news continue this myth. First, the Council on Foreign Relations has released a report calculating the impact on oil and gas production if “tax preferences” were eliminated for energy companies. Second, the Sierra Club launched a new initiative with the goal of ending global fossil fuel subsidies, including in the United States, by 2020, shifting the money to clean energy.

The presumption of both the CFR’s report and the Sierra Club is that oil and gas companies receive subsidies from the U.S. government. A closer inspection reveals that not to be the case as these companies only take standard business deductions that multiple manufacturers and industries also claim. Yet somehow, tax deductions available to industries across numerous sectors is spun into a tale of the government paying subsidies to oil and gas companies. It is economically irresponsible to make sound tax policy decisions based on such a fallacy.

Three long-standing tax deductions are typically targeted for elimination — percentage depletion, intangible drilling costs, and the domestic manufacturing deduction (also known as Section 199). All are critical as they enable energy companies to explore, develop and invest.

Removing important tax deductions would ultimately result in not only the loss of jobs and contributions to the U.S Gross Domestic Product, but investments the industry makes that have taken our nation from an era of energy scarcity to one of energy abundance.

According to a 2015 IHS study, repeal of the percentage depletion alone would cost the economy an average of 178,000 jobs per year and a loss to the federal government of a net $2.5 billion in tax revenue over ten years. These are numbers that cannot be ignored.

And as President Obama’s Council of Economic Advisers noted last year, “the oil and natural gas sectors alone contributed more than 0.2 percentage point to real GDP growth between 2012 and 2014 …” Additionally, “The contribution between 2012 and 2014, which does not count all economic spillovers, added substantially to the 2.4 percent average annualized rate of U.S. economic growth over these three years.”

Not only would jobs and GDP growth be jeopardized, but there would be a decline in production and a rise in both global oil prices and higher costs for consumers here at home, something the CFR report concedes.  

Ultimately the subsidy myth only serves to complicate and distract from efforts to advance comprehensive tax reform.  

If the last two quarters are any indication, the nation’s economy may not be rebounding any time soon, which just reinforces the need for comprehensive tax reform that does not discriminate against economically robust industries. A tax code that is uniform, simplified and encourages investment and job growth will stop our economic slide.


David Williams is president of the Taxpayers Protection Alliance.

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