Tax reform: A mountain too tall to climb?

The chairs of the House Ways and Means and Senate Finance committees have made tax reform a top priority.  Both are making a concerted effort to develop a consensus within their committees.  In addition, the special budget committee co-chaired by Sen. Patty Murray (D-Wash.) and Rep. paul Ryan (R-Wis.) has made tax reform a major issue on its agenda.

Based on media reports and growing wariness on the part of House leadership, the likelihood of real tax reform from any of these initiatives is not encouraging in spite of the recognition of the need.  The history of the tax reform act of 1986 as chronicled in Show Down at Gucci Gulch demonstrates the need for bipartisanship and trust.  That does not exist in this Congress.

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Some of the proposals floating around Congress suggest that the real objective is either to raise revenue and/or penalize certain businesses and the wealthy.  Such proposals fail the test of fairness and making the code simpler.  As the National Journal recently observed; “The injection of such populism is sure to exacerbate the partisan tensions in the budget talks.”  Reform driven by populism promotes class warfare and if successful will neither advance fairness nor promote economic growth.

The U.S. tax code has been described as a “complicated mess.”  It is over 73,000 pages in length and has grown by over 80 percent since the last major tax reform act in 1986.  Since that legislation, there have been nearly 15,000 changes to the tax law.  If true tax reform was the real objective of current efforts, it would start with the major goals to be achieved—a code that is simpler, more transparent, more equitable, avoids double taxation, avoids industrial policy provisions, and treats all companies equally. 

Over the past five years, the president, some Democrats, and green advocates have pressed the case for special treatment for “green energy incentives” and punitive treatment of oil and gas companies by claiming that they receive special and unjustified tax preferences.  Renewable energy has certainly benefited, getting the lions share of tax preferences that in recent years have averaged $20 billion annually, with about 80 percent going to non-hydrocarbon sources.   OMB and CBO data prove that assertions that oil and gas get special treatment are just plain wrong.  The major tax provisions that are being targeted by oil and gas opponents are the Section 199 manufacturing deduction, foreign tax credits, deductions for intangible drilling costs, and percentage depletion allowances.  None of these, you’ll note, are subsidies in any sense of the word.

Section 199, for instance, applies to all companies and was designed to promote job creation.  It allows employers to deduct 9 percent of their manufacturing or production costs.  Oil companies can only deduct 6 percent, of course. 

The irony of the call to discriminate against oil and gas companies is that the petroleum industry has been one of the few bright lights of economic growth.  As oil and gas production has increased so has domestic investment and job creation.  According to Department of Labor figures, while overall job growth between 2009 and 2013 has been an anemic 4 percent, oil and gas jobs have grown at more than four times that rate – 18 percent.

Foreign tax credit provisions were added to the tax code to make sure that companies were protected from double taxation.  This provision of the tax code applies to all US companies and is intended to protect US competiveness.  It has been in the tax code since 1918, and current proposals to modify its use by “dual capacity” taxpayers like energy companies are harmful to American competitiveness

Other provisions, like the IDC deduction or percentage depletion, are similarly intended not as “handouts,” but as economically vital means of ensuring that one of the most financially uncertain and capital intensive industries on earth remains active and vital in the US. They ensure that investors will not back away from exploration and development in the face of the uncertainties inherent to drilling for oil, and that the fiscal constraints of maintaining leases do not drive companies out of business. In the case of percentage depletion, the provision is already denied to large producers – another demonstration of the hollow nature of such plans.

Studies show that axing these provisions could curtail upwards of $17 billion annually in exploration and production investment and prevent about 400,000 new jobs from being created over the next decade.

Real tax reform would treat would promote fairness, simplicity, global competiveness, long-term economic growth, and avoid class warfare and discrimination.  In today’s highly charged political environment, that is a mountain too high to climb.

O’Keefe is chief executive officer of the George C. Marshall Institute, and president of Solutions Consulting, Inc. He has also served as senior vice president of Jellinek, Schwartz and Conolly, Inc., executive vice president and chief operating officer of the American Petroleum Institute, and chief administrative officer of the Center for Naval Analyses.