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Wrong Turn on Path to a Sound Energy, Tax Policy | Commentary

By Pete Sepp It’s rare in Washington for Democrats and Republicans to come together on any issue, much less energy or tax policy. Leaders in both parties say they want an “all of the above” energy strategy and a tax code that’s fairer and simpler. So does the American public. This type of broad agreement on the basics could present an opportunity for progress on legislation that gets down to specifics.  

Unfortunately, this opportunity is fragile. At a moment when more public officials are embracing the idea we need to generate more domestic energy at lower prices — as well as retool our tax system to be more competitive worldwide — some on Capitol Hill just cannot give up on outdated thinking that would move us in the opposite direction.  

Unfortunately, this thinking is reflected in parts of the latest comprehensive energy bill recently unveiled by leading Senate Democrats. The legislation commendably streamlines and simplifies the maze of clean energy tax credits.  

On the other hand, it also contains items that could prove contentious, none more so than in the matter of taxes on the fossil energy sector. Supporters refer to them with the ever-popular soundbite of “closing loopholes,” but they would actually discriminate against, and punish, the oil and gas industries.  

The U.S. tax code tends to recognize the economic growth potential of private-sector investment by taxing that investment less harshly. This is achieved largely by offering credits and deductions.  

U.S. energy companies are able to offset their cost of massive capital outlays for drilling, extraction, and other expenses through parts of the tax law — some apply specifically to oil and gas, but closely resemble those for many industries. Still others, such as the section 199 domestic manufacturing deduction, are widely available. The Democrats’ bill would kill both kinds of tax relief, but only for large oil and gas companies.  

Enactment of such a proposal could very well write the bad ending to what has so far been a great success story. Because of investment in new technologies that are driving growth in production, the U.S. Energy Information Agency predicts the United States will be a net exporter of natural gas by 2017 and that between 2019 and 2028, depending on price fluctuations, U.S. energy exports will equal U.S. energy imports. This means affordable energy for consumers and businesses here at home, and opportunities to compete abroad.  

But what will happen to those energy investments when the companies behind it are penalized with a tax burden even heavier than the one they bear now — heavier, by the way, than the average for all companies on the S&P 500? They will dry up and take with them steady domestic supply that has helped reduce the price of domestic oil and gas and generated thousands of potential jobs and wages for American families.  

In the meantime, the cause of tax reform would once again be severely harmed. An ideal corporate tax system would feature a much lower tax rate, a broader base of what is subject to tax, and less obtuse provisions for investment, such as allowing businesses to fully expense their capital purchases in the year they are made instead of forcing them to contend with depreciation schedules.  

The political calculus that can make this type of reform a reality is vital: Everyone must be in the same boat. A new tax law that’s full of ifs, ands, buts, and excepts, is no better than the old one. It creates the same kinds of economic distortions and political favor-trading we hope to avoid. Effectively writing “except for oil and gas” into a Tax Code that’s supposed to serve everyone better is shortsighted to say the least.  

Democrats and Republicans in Washington should focus on crafting a modernization of our energy policy that further develops our abundant resources, rather than picks winners and losers. They can also work on an overhaul of our tax laws that stresses lower tax burdens for all, ease of compliance, and the most equal treatment possible among occupations and industries. Completing both of these tasks would be a win-win for our economy and our future prosperity. Pete Sepp is president of the National Taxpayers Union.

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