The broader tax threat

April 2, 2012
In its fight against prejudicial tax increases, the US oil and gas industry receives welcome support from business in general.

In its fight against prejudicial tax increases, the US oil and gas industry receives welcome support from business in general. A populist assault on oil and gas threatens interests far beyond the targeted industry. And the threat reaches far beyond superficial costs.

The latest attack comes in a Senate bill introduced by Robert Menendez (D-NJ). The measure would hit the five largest oil and gas companies with tax changes proposed in budget proposals from the Obama administration, using the new tax revenue to fund nonfossil energy. The Senate was to have voted on the bill on Mar. 29, after this writing. Nearly identical bills have emerged before and failed. This one, even if passed by the Senate, will fail, too. The House will reject it. The bill is just a vehicle for demagoguery.

No learned answers

Here's a sample from Menendez: "People I talk to in New Jersey want to know why they're stuck paying close to $4 for a gallon of gasoline while these companies rake in billions of dollars in subsidies and record profits." So why doesn't the senator offer his constituents learned answers about crude prices, oil markets, tax policy, and persistent abuse of the word "subsidy" in energy politics?

Menendez doesn't have learned answers. His bill reflects misunderstanding of the subject onto which it would impose law. One of the "subsidies" it would deny BP, ExxonMobil, Shell, Chevron, and ConocoPhillips is percentage depletion on oil and gas production. Those companies haven't been able to use percentage depletion for many years. This laughable and repeated oversight gives no one reason to think the politicians who keep making it would know a real energy subsidy if one swiped their wallets in broad daylight.

Business groups opposing the Menendez bill focus persuasively on economic outcomes. Raising taxes on suppliers of oil and gas would raise the costs of energy. The logic is simple and certainly easier than the vagaries of tax law to communicate.

"Taxes and new fees would decrease domestic energy production and have previously proven to increase reliance on imported energy and to increase costs for consumers," wrote R. Bruce Josten, executive vice-president for government affairs of the US Chamber of Commerce, in a letter to senators. "Legislation intended to selectively punish energy companies is discriminatory, misguided, unwarranted, and ultimately counterproductive." He said legislation like the Menendez bill "smacks of political gimmickry."

Aric Newhouse, senior vice-president of policy and government relations at the National Association of Manufacturers, also wrote senators to make similar points. "Increased taxes on energy companies will increase the costs of fuel to manufacturers in the United States and other energy consumers," he said.

The oil and gas industry has obvious reason to welcome external support. At the same time, industries other than oil and gas have a strong reason, beyond energy costs, to provide it. Josten alluded to the reason when he criticized the selective nature of the proposed tax increases. If Congress succeeded in singling out the oil and gas business for mistreatment through tax law, what would stop it from punishing other industries that fell from public favor?

Smear campaign

All industries should worry about the campaign to smear oil and gas tax mechanisms. Many of those mechanisms are just timing preferences. One of them, relating to treatment of taxes paid abroad, exists to prevent double taxation of income. Another, the manufacturing deduction, isn't even unique to the oil and gas business. Assertions that taxpayers "give" oil and gas companies billions of dollars in subsidies each year represent distortion bordering on dishonesty.

For all of business, exploitation of complexity makes the political climate noxious. Politicians hoping to punish oil and gas companies now with laws based on misrepresentation won't hesitate to treat companies in other industries similarly when doing so suits their purposes. For all of business, the fight over oil and gas taxation has to do with more than the cost of energy.

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