Comprehensive, Not Punitive, Tax Reform is Needed

This article appeared in The Desert News on February 6, 2015

There have been serious rumblings that Congress will attempt to tackle comprehensive tax reform this legislative session. This is encouraging news. Even more encouraging are reports that President Obama and Senate Majority Leader Mitch McConnell, R-Kentucky, sat down and discussed the issue after the midterm elections. Senate Finance Committee Chairman Orrin Hatch, R-Utah, and ranking member Sen. Ron Wyden, D-Oregon, have even established working groups to study tax reform.

And remarks from the president in his State of the Union speech last month and from Sen. Joni Ernst, R-Iowa, in the Republican response further illustrated that both parties may be willing to work together to do something when it comes to tax reform.

Chairman Hatch has called tax reform “very difficult to do” and noted “we may have to do it in stages, but I think we can do it.” The last major reform of the tax code was the Tax Reform Act of 1986, and it was a bipartisan effort. For the sake of public interest, let’s hope Sen. Hatch is right and Republicans and Democrats can once again come together to make a serious run at real tax reform.

If they can, it would be the first time in almost 30 years lawmakers have attempted to tackle our onerous tax code. It’s fair to ask why we even need comprehensive tax reform.

That’s an easy one to answer. Our tax code, at its core, is as dysfunctional and discriminatory as that of any Third World dictatorship. It is a ponderous and complex system where honest companies are pilloried with the highest tax rates in the industrialized world. And taking a look at the recent congressional debate over tax extenders, it’s clear that piecemeal tax fights and short-term fixes only underscore the need to pursue comprehensive reform that addresses the challenges of that code.

Republicans and Democrats must work towards reform that will lower both business and individual tax rates while bringing fairness and simplicity to the workings of the system. The goal should be a tax code that is uniform across the board, allowing all industries to know what their taxes will look like from year to year without fear of a politically motivated tax hike so they can plan future business decisions.

We don’t have that right now. What we do have is a federal tax code that can be used as a club against certain industries, most notably the oil and natural gas producers. Energy tax advocates in Washington are pushing plans that would strip away certain tax incentives and deductions from only this industry while leaving the same provisions intact for all other industries like the solar power industry. This narrowly focused attack on domestic energy producers would inescapably raise energy prices for consumers and businesses, kicking our economy as it is struggling to regain its feet.

Just last month, Treasury Secretary Jacob Lew singled out the oil and gas industry in a speech at the Brookings Institution, stating that, “oil and gas producers are rewarded with a number of special-interest tax breaks that unfairly reduce the taxes of oil companies far below what other industries, like retail and manufacturing, pay on their earnings.” With all due respect to Lew, that simply isn’t true.

Extensive research by S&P Capital IQ for the New York Times found that U.S. energy companies pay a higher effective tax rate than other industries in the S&P index — 37 percent as opposed to 29 percent. Yet job growth in the sector has consistently outpaced growth in other sectors of the economy in recent years. And on the bigger picture front, these are also the same companies whose technology-driven expansion of domestic oil and gas production over the last 10 years has ended America’s chronic dependence on foreign energy.

Lew’s statement is emblematic of a broader desire on the part of many to mischaracterize this industry’s tax burden in hopes of advancing an agenda, ignoring nonpartisan data in favor of charged political rhetoric.

This tactic of pushing for even higher energy taxes — a surefire path to killing jobs, dampening new investment and undermining our nation’s long-term energy security — was integral to the tax reform package previously introduced by former Sen. Max Baucus, D-Montana, who is now ambassador to China. Higher energy taxes were also central to former finance chairman (and current ranking member) Ron Wyden’s, D-Oregon, reform plans. A better way forward was a proposal from former Rep. Dave Camp, R-Michigan, which, although it wasn’t perfect, was a plan we could build on.

It is clear the current tax code is broken and only comprehensive reform can fix it. But first we must disabuse ourselves of the notion that we can single out domestic oil and natural gas producers for punitive taxation without causing havoc in our economy.