Approaching the Grand Bargain: The Reality and Myths of Energy Tax Credits

While Washington, DC is in the midst of a government shutdown and looming under the specter of the debt ceiling, discussions on Capitol Hill have turned to a grand bargain as a potential exit strategy.  Grand bargains are complex and probably involve too many elements to get quick agreement.

The quickest way to ensure that the government reopens and the United States does not default on loans is through a deal that both sides can agree on.  That could involve a two step process involving first a clear continuing resolution and debt ceiling increase with a public commitment to next steps.  Tax reform could be part of the agreement.  While a commitment to sweeping reform to taxes and benefits could sweeten the deal, there is also the potential for unintended consequences. A sweeping deal could include everything from entitlements to tax reform.  However, certain rhetoric has the risk of inadvertently hurting American businesses and impeding economic recovery.

The frequent usage of the term “loopholes” by the administration in discussing tax reform has in fact been targeting legitimate and economically vital deductions that American businesses use to be competitive. For example, the categorization of provisions utilized by the American energy industry such as the Section 199 manufacturing deduction or protections for American dual capacity taxpayers as “giveaways” is a clear indication of the problem surrounding the rhetoric of the tax reform debate.

In fact, these provisions and similar items are in place only to ensure that American companies, not just the oil industry, are taxed only on their real income and to create secure investment scenarios that provide a level playing field and pave the way for job creation. The mischaracterization of these deductions as “loopholes” or “giveaways” is not just misleading; it is toxic to what should otherwise be a fruitful debate around tax reform.

Today, the American economy is still in a fragile recovery. While overall job growth has grown at only four percent from 2009 to 2013, jobs in the oil and gas industries have skyrocketed by comparison with growth at 18 percent, according to figures from the Department of Labor.  The Progressive Policy Institute has published a report that shows the industry invested more than $56 billion in the American economy in 2012, the leading investment “hero” among the sectors analyzed in the report.

The prospect of reforming the overly-complicated tax code and stabilizing the deficit is encouraging to further economic growth.  Both are desirable fiscal goals. However any attempt of tax reform, be it part of a grand bargain or not, that does not correctly characterize legitimate deductions and misleads the American public into believing that they are “loopholes” is not only counterproductive, but threatens to impede upon the progress of our economic recovery. Tax reform should focus on simplicity, fairness, and a level playing field here and abroad for private investment that stimulates economic growth.

Everyone wants to see an end to the political gridlock in Washington. As lawmakers work to pull us out of this mess, they need to be sure that they operate with a clear understanding of the word “loophole” and do not remove the solid foundation upon which the energy industry has driven our economy.

 

This article appeared on the FuelFix weblog at http://fuelfix.com/blog/2013/10/09/approaching-the-grand-bargain-the-reality-and-myths-of-energy-tax-credits/

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