Targeted Tax Hikes Have No Place in Tax Reform

The most recent jobs report was, for lack of a better word, dismal. According to the Department of Labor, the economy only added 38,000 jobs last month, a far cry from the predicted gain of roughly 160,000 jobs. Adding insult to injury, the job gains from March and April were revised down by 59,000.  And even more disheartening is that while the unemployment rate fell to 4.7 percent, that decline wasn’t driven by increased hires, it was driven by potential workers halting their job searches.

Federal Reserve Chair Janet Yellen’s response was rather understated.  In a speech to the World Affairs Council of Philadelphia, she said, “Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report.”  Unfortunately, the “single monthly report” is amidst an economy that has underperformed over the last few quarters.   And, that monthly report isn’t just numbers, it’s real people being affected by the stagnant economy.

Now, people certainly don’t expect the Federal Reserve Chair to run around like Chicken Little, warning Wall Street and investors that the economic sky is falling.  But, the American public would expect more of a sense of urgency given it’s clear that our economy still hasn’t fully shaken the after effects of the recession, as shown by the lackluster job numbers and anemic economic growth.

There’s a solution to this problem and not only is it staring Republicans and Democrats in the face, but it’s a solution that overall, they agree upon: comprehensive tax reform.  The last time the United States had comprehensive tax reform was 30 years ago in 1986.

The Senate Committee on Finance, which last summer produced several reports from its tax reform working groups, will hold a hearing today titled, “Energy Tax Policy in 2016 and Beyond.”  In announcing the hearing, Senate Finance Committee Chairman Orrin Hatch (R-Utah) stated, “As the Committee continues to chart the course towards a comprehensive overhaul of the tax code, a thorough review of energy tax provisions is a must. With this hearing, members of the Committee will have the opportunity to explore how the code affects the energy industry and what policies have the most merit as we look forward towards tax reform.”

Chairman Hatch is taking the correct, pragmatic approach to the issue.  This is in contrast to many lawmakers and presidential candidates who prefer to unleash election year rhetoric aimed at the energy sector rather than have an honest discussion. Promising to take away alleged “subsidies” from only oil and gas companies – and not for example, solar – under the guise of tax reform.  This is not only an inaccurate use of terminology, but it’s not the way to achieve a tax code that is simplified and uniform.  It would, in essence, pick economic winners and losers.

As this infographic helpfully points out, subsidies are “direct payments from the government to a corporation with the goal of boosting its prospects.”  On the other hand, a deduction “enables a business to write off its legitimate expenses and calculate its tax liability based on net income.”  The energy industry, like every other industry in the S&P 500, takes deductions, not subsidies.   Yet this distinction is lost, or perhaps conveniently ignored, by those who advocate taking key tax provisions away from one industry alone.

For example, the commonly used Domestic Manufacturer deduction (known as Section 199) is available to all businesses that participate in manufacturing, producing, growing or extraction in the U.S.  Yet time and time again, the Obama Administration has called for its repeal for the energy industry alone.

The energy industry is a critical component of our economy, not only providing millions of jobs and contributing to the nation’s Gross Domestic Product (GDP), but it is driving the current energy renaissance through technology and innovation.  Denying industry tax deductions puts these important economic provisions in jeopardy, resulting in job losses and higher energy prices.

Our current corporate and individual tax code is a byzantine mess, which is a serious barrier to economic growth and investment in the nation.  After thirty years of waiting for comprehensive tax reform, it’s well past time for an overhaul.

David Williams is president of the Taxpayers Protection Alliance.