Economy & Budget

Don’t reform the tax code on the backs of over-taxed energy producers

In business-speak, a “cash cow” is a commercial activity that, after an initial capital investment has been paid off, continues to generate income and profits for years to come with little or no additional expense.

In political-speak, “cash cow” refers to an industry that can be milked for taxes seemingly without limit. The prime example today is the U.S. oil and natural gas industry. Despite its strong growth, robust job creation, huge annual payments into the U.S. Treasury, and vast sums spent on developing new supplies, Washington apparently thinks that energy producers can and should be milked dry.

{mosads}It’s a metaphor for the dairy cow that continues to produce milk over the course of her life. The cow does most of the work.

It should be no surprise that legislation designed to elicit campaign contributions from individuals and groups threatened by some new public policy is called a “milker bill” on Capitol Hill.

President Obama’s $3.9 trillion budget proposal for fiscal year 2015 envisions new revenues amounting to $1 trillion over the next decade, mostly coming from tax increases. The president’s plan reprises his yearly call for higher taxes on oil and gas producers, which – oddly enough – is part of his ill-conceived “all of the above” energy policy.

He has for years mischaracterized legitimate, congressionally enacted tax deductions as “subsidies” and claimed that the oil and gas sector could easily bear a much heavier tax burden. The tax reform package introduced by Sen. Max Baucus (D-Mont.) takes a similar, if somewhat less of a “red meat” approach, to energy companies.

Although a tax reform proposal floated recently by Rep. Dave Camp (R-Mich.), chair of the House Ways and Means Committee, seems at the moment to be a reasonable alternative worth considering, it, too, singles out specific industries, like domestic energy producers, for differentially high tax bills.

But, that’s true already.

A survey published last year by the New York Times showed that major energy firms “typically pay high rates.” Looking at data from 2007 through 2012, the Times reported that U.S. energy companies’ federal, state, local and foreign tax bills averaged 37 percent of taxable corporate income, while the effective income tax rate for S&P 500 companies as a whole was 29.1 percent. And, a recent study by the Washington-based Tax Foundation finds that the effective tax rate imposed on multinational corporations based in the United States, including our largest oil and gas companies, is “extremely high” and, in fact, the highest in the world since Japan lowered its taxes on multinationals headquartered there.

Because of the shale oil and gas boom, governments have become ever more dependent on energy tax revenues. Between 1981 and 2008, again according to the Tax Foundation, the oil industry paid more than $388 billion to the federal and state governments in corporate income taxes, but they paid almost twice that amount, $683 billion, to foreign governments. Analyzing federal energy data, the Tax Foundation showed that governments here and abroad “are hugely dependent upon the direct and indirect taxes paid by the largest consolidated oil companies, and that between 1981 and 2008 these tax payments exceeded corporate profits by 40 percent.”

While energy companies pay very high taxes, they also plow their earnings back into research, exploration and new infrastructure. Money spent on drilling, transport and refining are key drivers of growth and job creation. In the exploration and production sectors alone, investment bank Barclays Capital predicts that U.S. oil and gas firms collectively will spend $156 billion next year, up 8 percent from $144 billion in 2013.

Such facts explain why major U.S. energy companies were recognized last year as “Investment Heroes” by the Washington-based Progressive Policy Institute. That organization reminds us that, “a high-growth strategy requires strong investment — private and public — in our nation’s productive and knowledge capacities.”

As we enter into the necessary debates and discussions on tax reform, the one thing that should not be in dispute is that our system is in dire need of a root-and-branch overhaul. Camp’s bill is a great start. Yes, there are things in it that should be reworked to level the tax playing field. Repeal of “Last In First Out” accounting or oil and gas depletion allowances, for instance, adversely impact the energy sector.

America can no longer afford a business-as-usual approach in a world in which competition increasingly is global. People on the left, who disparage American “exceptionalism”, argue that we should look to Europe for public policies to adopt here. If so, we should mimic tax policies in the rest of the world that do not punish investment, job creation and business expansion, especially in a sector that the United States, owing to the shale revolution, is poised to dominate.

If we’re going to do tax reform, let’s do it right.

Shughart, research director and senior fellow of the Independent Institute, is J. Fish Smith Professor in Public Choice at Utah State University’s Huntsman School of Business

Tags Max Baucus

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