In the wake of the Treasury Department’s recent announcement of new rules designed to curb corporate inversions and Tax Day 2016 coming and going, tax reform is center stage once again. President Obama rightfully chided Congress for failing to take action, stating: “I want to be clear. While the Treasury Department’s actions will make it more difficult… to exploit this particular corporate inversions loophole, only Congress can close it for good.”
Unfortunately, while both parties actually agree on the need for comprehensive tax reform, there is much disagreement on how to achieve that goal. For the Obama Administration, the way forward is fairly clear (and misguided): single out and tax the traditional energy industry.
This is abundantly evident when one examines the Administration’s yearly budget proposal it submits to Congress each year. Unfailingly, buried in the document are provisions that would repeal certain tax deductions, but only for the oil and gas industry. Favorite targets include the expensing of intangible drilling costs (IDC) and the domestic manufacturing deduction, commonly known as the Section 199 deduction.
The purported goal of the provisions are to “phase out inefficient subsidies for fossil fuels.” Once again, we have the Administration mischaracterizing what is a subsidy and what is a deduction. It’s actually fairly simple.
A subsidy is a direct payment from the government, typically to prop up an industry – think solar or wind power. On the other hand, a deduction permits a business to write off legitimate business expenses, allowing it to calculate its tax liability on net income.
Considering they are basing tax policy on this, one would think they would take care to use these terms correctly.
More importantly, these are deductions have played a critical role in technological advances and innovation, resulting in the nation’s current energy renaissance. In particular, the IDC deduction is of paramount importance as it allows the industry to deduct costs – such as labor and site preparation – to drill a well. To repeal it would threaten innovation and exploration in the energy industry, raising the cost of drilling and development in the United States.
And notably, the Section 199 deduction is widely available to – and utilized by – multiple industries, so what is the purpose behind only taking it away from one specific industry? There is nothing unique about the oil and gas sector that calls for punitive tax treatment within the tax code.
Adding insult to injury, the Administration also proposed a $10.25 tax per barrel of oil in the fiscal year 2017 budget. Not only would this fee ultimately be passed on to the American consumer, but it would provide a further hit on a sector already feeling the pinch of low oil prices. Indeed, the nonpartisan Congressional Research Service found that “Weakening employment availability in the oil and related industries is likely to be increased due to the fee.”
What’s ironic about the president proposing these policies is that his own Council of Economic Advisors highlighted the nation’s energy revolution – which, incidentally, the oil and gas industry has been a driving force– in its 2015 economic report. Specifically, “Increasing production of oil, natural gas, and renewable energy has contributed broadly to employment and gross domestic product (GDP) growth during the recovery from the Great Recession.”
Lost in the rhetoric of budget documents and stump speeches about “Big Oil,” is the very real reality that the nation has benefitted tremendously from the energy sector. Technology and innovation on its part led to an energy boon which led to the low gas prices Americans are currently enjoying. Not to mention the millions of American jobs the industry supports. Taxpayers also benefit because a growing economy means more revenue from an expanding economy and fewer reasons to raise revenue through tax increases.
Good soundbites don’t always make sound policy. Not only does it make little economic sense to target any sector of the economy, be it energy or another, but it won’t accomplish anything other than making some politicians feel good. In order to get the country’s economic engines moving again, Congress to pass comprehensive tax reform that treats all sectors equally.
David Williams is president of the Taxpayers Protection Alliance.