Tax Reformers Need to Focus on Growth, Not Targeting the Energy Industry

By January 22, 2014Taxation

Manufacturers are totally frustrated with our outdated, anti-competitiveness, anti-growth tax system and appreciate the current focus in the White House and on Capitol Hill on improving our nation’s tax system. As we’ve said many times before, any effort to rewrite the federal tax code should result in a balanced, fiscally responsible plan that allows manufacturers in the United States to prosper, grow and create jobs and also enhances their global competitiveness.

Moreover, since manufacturing accounts for roughly one-third of the energy consumed in the United States, it also is critically important that any tax reform plan allows our nation’s energy producers to make the necessary investments to ensure our nation’s energy security and avoids increasing the tax burden on this vitally important industry sector. Maintaining diverse, reliable and affordable energy sources is crucial to jobs, competitiveness and overall economic growth.

With that in mind, we were shocked by Daniel Weiss’ assertion in a January 17th Real Clear Politics editorial that “one simple tax reform that Congress should pass right away that would make the federal tax code fairer and reduce the deficit with almost no impact on the economy: end special tax breaks for the five biggest oil companies.” Nothing could be farther from the truth.

Let’s start with a simple fact: providing the energy needed to support manufacturers and the broader U.S. economy requires large capital investments by the private sector. Promoting investment should be an integral part of comprehensive tax reform, particularly as it relates to investments in developing our nation’s energy supplies.

In particular, finding and producing domestic oil and natural gas requires large and continuing capital investments. Drilling oil and gas wells involves a number of costs, including labor, repairs, fuel, chemicals, supplies and other expenses that have no salvage value. Under longstanding tax policy rules, energy companies can deduct these costs—known as intangible drilling costs (IDCs)—as ordinary and necessary business expenses, reducing the cost of exploring for and producing oil and gas.

For manufacturers and other energy consumers, the development of shale natural gas in the United States has been a “game-changer” in terms of reduced energy costs, increased access to secure energy supplies and availability of a low-cost raw material. The chemistry industry alone has generated billions of dollars of new investment thanks to this innovation. IDCs cover about 70–80 percent of the cost of a shale gas well. It’s not hard to imagine the negative impact of eliminating the deduction of IDCs as Mr. Weiss suggests.

In the same vein, Mr. Weiss suggests eliminating the Section 199 deduction for U.S. oil and natural gas production, refining and processing. Sec. 199, which was included in the 2004 American Jobs Creation Act, is designed to reduce the tax burden on all domestic manufacturers and help spur investment and create jobs in the United States. Congress already took a swipe at the energy sector by limiting the deduction for oil and gas production. The total repeal of this deduction for the energy sector would further target these companies and, in the process, discourage new oil and gas investments in the United States by making them less competitive economically with foreign opportunities.

Also keep in mind that reserving U.S. energy companies’ access to global natural resources is critical to U.S. energy security. Unlike their competitors, U.S. energy companies with overseas exploration and production operations—so-called “dual-capacity” taxpayers—pay both U.S. and foreign taxes. Current tax rules for dual-capacity taxpayers—already stricter than rules for other taxpayers—reduce the potential of double taxation of income in the U.S. worldwide tax system and limit foreign tax credits to payments that are truly in the nature of income taxes. Existing rules specifically deny foreign tax credits for some payments, such as royalties paid to access a natural resource.

Mr. Weiss suggests that policymakers deny foreign tax credits even for income taxes paid by dual-capacity taxpayers. These proposals will unfairly and retroactively overturn well-established and longstanding rules, subjecting American energy companies to harmful double taxation on new and existing investments. 

NAM has a different message for policy makers on tax reform and the energy sector. In contrast to a tax system that encourages investment in new energy sources and energy efficiency, imposing discriminatory taxes on the energy sector will result in higher costs for all energy consumers in the United States. The increased cost for manufacturers will make it more expensive to produce in this country and make them less competitive in foreign markets, putting millions of current manufacturing jobs at risk.

New energy taxes also will set back current efforts to achieve energy independence. As noted above, the United States has made great advances recently in developing new sources of domestic energy. Unfortunately, imposing targeted tax increases on energy companies will discourage oil and gas investments in the United States, working against the goal of enhancing America’s energy security and boosting new, domestic investments in affordable energy sources.

The NAM remains adamantly opposed to targeted energy taxes, whether in the context of tax reform or as part of a separate effort. Manufacturers believe that tax and energy policy needs to focus on enhancing America’s energy security by encouraging new investments in affordable sources of energy, not imposing new taxes on the energy industry.


Dorothy Coleman

Dorothy Coleman

Dorothy Coleman is vice president of tax and domestic economic policy at the National Association of Manufacturers (NAM). Ms. Coleman is responsible for providing NAM members with important information related to tax issues and representing the NAM’s position to Congress, the Administration and the media. An NAM spokesperson for tax policy issues, she coordinates membership coalitions; prepares testimony, reports and analyses; and responds to media inquiries. Before taking over as vice president of the tax policy department, she served as director of tax policy from April 1998 to April 2000.
Dorothy Coleman

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