Stop Confusing Good Tax Policy With Subsidies

By February 26, 2013Taxation

This morning, a report released under the Hamilton Project banner of “Innovative Approaches to Tax Reform,” proposes the “Elimination of Fossil Fuel Subsidies.”  Unfortunately, the paper ignores sound tax policy and takes aim at a package of long-standing tax provisions that enable oil and gas companies to explore and develop new domestic sources of energy.

Indeed, Manufacturers take umbrage to a number of assumptions in this paper. So let’s start at the top. The report argues that the so-called “subsidies” provided to the industry for domestic production “have a very small impact on production” and thus eliminating these (so-called) subsides would have “a very small impact on production, their removal will not materially increase retail fuel prices, reduce employment or weaken U.S. energy security.” This belies so many real-world facts that we just had to respond.

First, the provisions in question are not subsidies. They represent sound tax policy that, among other things, allow energy companies to deduct ordinary and necessary business expenses and recover their capital costs. In contrast, subsidies are direct payments from the government to entities. This is clearly not what the paper is talking about.

One thing on which manufacturers can agree with the author is the need to enact a “simpler, more efficient tax code” – this is true especially in today’s world where the U.S. has the highest corporate tax rate. This leads to the second fact that is ignored in this report… that oil and gas companies with a global market and worldwide consumers have to look at worldwide production opportunities and U.S. production projects have to compete with opportunities elsewhere. With this reality, good tax policy matters in attracting development and production–and jobs– in the U.S. Despite the author’s assertion that “none of the current tax expenditures for fossil fuels targets novel techniques or … promotes innovation,” horizontal drilling and the sophisticated techniques used in hydraulic fracturing are two innovations that are fairly recent, were costly to develop and have resulted in the development of game-changing resources that are still emerging. And these projects are a boon to local domestic economies where they are ongoing.

Continuing along with our fact-checking, how did the author conclude that oil and gas production is not manufacturing as a basis for his argument that the domestic manufacturing tax deduction for oil and gas should be eliminated? Merriam Webster defines manufacture as: “1) something made from raw materials by hand or by machinery; 2a) the process of making wares by hand or by machinery especially when carried out with division of labor, b) a productive industry using mechanical power and machinery; 3) the act or process of producing something.” That pretty much sums it up, by all accounts oil and gas production is manufacturing by its very nature. Perhaps a refinery tour is in order!

Finally, the report is a wolf in sheep’s clothing as it is apparent that the author seeks to use the tax code to advance an environmental agenda. Throughout the report the author refers to the environmental benefits of a reduction in carbon emissions resulting from a reduction in production and consumption. Manufacturers, like all concerned citizens are concerned about the environment. However, if the author wants to have an environmental debate and address what he proposes as environmental impacts, then that debate should not be engaged under the guise of tax reform.

Manufacturers strongly support comprehensive tax reform, one that lowers the corporate rate to one that is competitive, includes a territorial system of taxation, that includes a permanent and strengthened R&D credit, includes permanent lower rates for small businesses and that includes a robust capital cost recovery system. With these principles as a starting point manufacturers want to engage in a tax reform discussion but if the starting point is from the position taken by this author, then this debate may remain long-awaited.

Carolyn Lee

Carolyn Lee

Senior Director of Tax Policy at National Association of Manufacturers
Carolyn Lee is Senior Director of Tax Policy at the National Association of Manufacturers (NAM), the nation's largest industrial trade association. In this role Carolyn is responsible for portions of the NAM's tax portfolio including issues individual marginal tax rates - which are a top priority for small and medium sized manufacturers - as well tax issues relating to investment income, energy efficiency and capital cost recovery.
Carolyn Lee

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