Punish Success, Reward Failure?

An important role of the government is to provide fair rules and a level playing field on which businesses can function and compete. The Rule of Law should be paramount. When the government proposes to tilt the playing field against specific industries, it is treading on very dangerous ground. Once begun, where is the stopping point? Instead of functioning as an impartial referee, the government will be the bookmaker who fixes the game. The unintended consequences will be profound.

Kicking the oil industry has always been political fair game in Washington. And this year is no exception. What is different is that the President has been pushing this punitive agenda, a false one at that, for several years.

The so-called tax breaks for the oil industry that the President has been harping on are not unique to the oil industry. Let me repeat, these tax code provisions are not unique to the oil industry. What he is doing is using the technique of repeating a claim until it is accepted as fact. This notion that the oil industry receives preferential treatment is, to quote Vice President Biden, malarkey.

The tax provisions most often cited are Section 199, which deals with domestic manufacturing, dual capacity provisions that protects foreign profits from being taxed twice, intangible drilling costs, and the depletion allowance.

Section 199 of the tax code applies to alldomestic manufacturing and is intended to be an incentive for investment that creates US jobs. Even as written it discriminates against the oil industry. Every other qualifying organization receives a 9 percent deduction from profits; the oil industry has been limited to 3 percent since 2008. It goes beyond ironic that politicians want to take this away from the oil industry. When the US work force was shrinking by over 4 percent, oil industry employment grew by 22 percent, according to the Bureau of Labor Statistics.

Dual capacity is a tax code provision designed to protect US companies from being subjected to double taxation; first by the country where income was earned and again by the US. Like section 199, it applies to all companies. Eliminating it for oil companies would harm their ability to compete with national oil companies and reduce investments and employment.

Intangible drilling costs provisions allow oil companies to expense costs, such as wages, fuel, repairs, etc., associated with energy drilling. They are designed to give oil and gas companies the same treatment on operating expenses that companies in other industries enjoy. While these tax provisions are unique to the oil industry, they do not represent special treatment. Rather they are intended to provide equal treatment. Even so, major oil companies are limited in how much they can deduct in the first year of drilling.

Finally, there is the depletion allowance which applies to all mining. It allows drillers to deduct 15 percent of a well’s revenue from taxable income each year to depreciate the value of a well. It is available only to independent drillers. It was taken away from major oil companies over 30 years ago. So, this is a case of the President wanting to eliminate something that doesn’t exist. Does the word demagoguery come to mind?

The Congressional Budget Office and the Energy Information Administration have doneanalyses of energy “subsidies” which have been on steroids over the last several years. The bulk of them, about 80 percent, go to renewables and efficiency. Fossil energy gets about 10 percent. Proposals to take away tax benefits from oil companies that are available to all companies are pure discrimination, which as a nation we reject – or at least should.

When the government has the ability to punish success while rewarding failure, it’s a clear sign government has gotten too big, too powerful, and too intrusive. Thomas Jefferson over 200 years ago observed “a government big enough to give you everything you need is a government big enough to take away everything that you have.”

Instead of seeking to hamstring the oil industry, the Administration and Congress should be focusing on major tax reform that makes our system simpler, fairer, and better for American businesses to compete in the global economy. US companies presently are at a competitive disadvantage because of a punitive tax code that has the highest tax rate in the developed world. They should solve a real problem instead of one created out of whole cloth!

Originally published by the National Journal at http://energy.nationaljournal.com/2012/10/should-oil-and-naturalgas-tax.php#2253278

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