The White House has announced that the Trump administration is “driving the train” when it comes to tax reform. This is good news as White House leadership has always been vital to tax reform.
An important first step happened recently with a House Energy and Commerce Subcommittee hearing on energy tax policy, which also provided an opportunity to correct distortions and misconceptions in the current tax code. As the reform process evolves, lawmakers should ensure equal treatment of all economic sectors — energy, retail, insurance, manufacturers, pharmaceutical and others — as attention focuses on how to enact comprehensive tax reform.
The subcommittee hearing announcement noted, “Reform could affect a host of energy sectors by putting incentives at risk, including deductions and allowances enjoyed by oil and gas companies; breaks for wind, solar and other renewables; and the production tax credit for new nuclear facilities.”
That is a fair objective but the energy industry should not be singled out for “special treatment” when it comes to reform. Punitive provisions not only discriminate, they distort resource allocation. Unfortunately, some subcommittee members trotted out their time-worn arguments about alternatives and false claims about the energy sector’s tax provisions, ignoring important testimony that refuted their rhetoric.
The reality is that in spite of efforts to favor alternatives, U.S. oil and gas production has surged and U.S. companies have become major petroleum exporters. The potential exists to achieve a dominant role in the global energy market and by doing so contribute even more to our economic growth. Removing barriers and distortions in the current code is an important step toward that goal.
The failure of the House to move on health care legislation has complicated tax reform because the assumed $1 trillion in a lower budget baseline now does not exist. As a consequence, static CBO scoring is likely to conclude that any serious reform adds to the deficit. That should not be the case if reform creates incentives to save, invest and bring foreign-earned capital back to the United States.
In drafting legislation, Congress should start with a set of guiding principles. These should include enabling American companies to compete fairly and freely in the global market, providing confidence that encourages long-term investment, treating all companies equally in terms of deductions and incentives, providing a level playing field, and avoiding provisions that either penalize or favor specific industries.
Tax reform along the lines of the House Blueprint would enable U.S. companies to better compete globally by reducing the corporate tax rate from the highest in the developed world — 39 percent — to 20 percent, which is in line with the global average of 22.5 percent. The Blueprint also provides for immediate expensing of capital investments, which also will helps U.S. companies compete in the global marketplace. Such changes are necessary but hardly sufficient, since there are pressures to discriminate against the oil industry.
Some special interests wrongly claim that the current tax code contains special provisions favoring the oil industry. This assertion has been rebutted over and over but this false claim continues to gain traction among some lawmakers. Tax reform that targets provisions taken by the oil industry, such as the production tax credit and foreign tax credit, will reduce domestic investment and the jobs that come with it. In the five-year period from 2011 to 2015, energy producers invested more than $160 billion in domestic infrastructure.
What tax reform legislation should do is eliminate all special interest subsidies that unfairly prop up uncompetitive industries. Benjamin Zycher of the American Enterprise Institute was clear on this point in his testimony: “Among the central energy-related tax provisions now in effect, the subventions for various unconventional forms of energy … are subsidies. (They) are likely to yield resource waste and thus to make the economy smaller.”
His conclusions were supported by another witness, Robert Murphy of the Institute for Energy Research, who testified that “policymakers should … raise revenue in a manner that distorts consumer and producer behavior as little as possible. … This principle is routinely violated when it comes to tax policy and energy markets” with renewable provisions being the most egregious distortions.”
Tax reform provisions, as Zycher noted, should focus on two questions, “Does it make the economy — the total size of the aggregate economic ‘pie’ — larger? Or: Does the given policy actually correct for inefficiencies in resource use created by other government policies?”
If tax reform legislation answers yes to both questions, capital investment will increase, the energy industry will continue to make strong contributions to economic growth, and resources will not be wasted attempting industrial policy initiatives that inevitably fail.
Policymakers now have a promising opportunity to advance the comprehensive tax reform and encourage the traditional energy sector — indeed all sectors — to invest in America’s economy and ensure businesses are not stifled by America’s outdated tax code. Support for reform along the lines of the Blueprint is widespread within the economic community.