After years in the drawing room, Senate Finance Chairman Max Baucus, D-Mont., recently released a set of drafts addressing our nation’s outdated tax code. If the early drafts’ treatment of the energy sector is any indication, small businesses inside and outside of the oil industry have reason to be on high alert.
From intangible drilling costs to percentage depletion allowances and more — Baucus leaves few stones unturned when it comes to the tax treatment of oil and gas operators within these initial proposals. The industry, not surprisingly, is up in arms regarding the impact these draft plans, along with those focused on international taxation, would have on a sector that is creating more jobs and fueling more growth than any other.
Some lawmakers looking to raise taxes on oil and gas see little downside in going after the industry. They justify their proposals by claiming that the only victims of these tax hikes will be big energy company CEOs. Unfortunately, while it makes for good politics, such rhetoric is factually wrong. It fails to recognize the important value the industry provides across our economy. And just as important, it overlooks the pivotal role that small businesses play in fueling the industry’s growth and innovative progress.
Flawed as this logic may be (and really, should taxes be levied based on who can best afford it?), such politically expedient talk intentionally or naively downplays the impact that these increased taxes will have on the economy at large, as well as on the many small businesses and workers within the sector.
This spring my organization, the Small Business and Entrepreneurship Council, released an analysis examining the role of small business in the nation’s oil and gas industry. We found that the vast majority of firms engaged in the energy sector or in service of the sector are small businesses, most with 20 employees or less. Whether in extraction, operations, construction or machinery manufacturing, the numbers paint a clear picture. These firms grew faster than businesses in most other sectors and experienced robust employment growth. New business formation in oil and natural gas has been significant.
In reality, when the tax hikers talk about taxing big oil and big energy, they are hurting thousands upon thousands of small businesses that add to employment and economic growth.
The effect of the tax hikes will drive down new exploration and development initiatives, making such activities far less cost-competitive. They’ll make it that much harder for American companies to keep pace overseas and, therein, bring profits back home.
Outside of the firms large and small and the employees who will be directly impacted by tax hikes on U.S. oil and gas companies, such increases also mean higher energy prices across the board — including for small businesses.
The political allure of taxing oil and gas will no doubt continue to rear its ugly head as the long and laborious process of reforming our nation’s tax code advances. These tax hikes have been a central component of the messaging deployed by many in Congress and in the White House for years, after all. But the process of tax reform is far too important to allow hollow rhetoric and counterproductive policy to infringe on what should be an opportunity to meaningfully improve our nation’s competitive position and economy.
If conducted with an intellectually earnest and results-oriented approach, reforming our tax code will make it easier for businesses — both large and small — to succeed here in the United States and compete abroad. But if reform is determined by piecemeal, punitive or selective policy, businesses will find themselves less competitive than before reform was initiated.
For the sake of small businesses and their employees nationwide, lawmakers must begin to recognize the harm of such proposals that sap growth in the small business community. If sound policy wins the day in reform negotiations, so will America’s small businesses.
Karen Kerrigan is president and CEO of the Small Business and Entrepreneurship Council.