A compromised tax bill

Dec. 27, 2010
A last-minute tax bill, hailed for the bipartisan compromise that produced it, leaves the oil and gas industry with much to fear.

A last-minute tax bill, hailed for the bipartisan compromise that produced it, leaves the oil and gas industry with much to fear. Perfection, of course, was never in prospect for legislation passed during the administration of President Barack Obama that extends tax cuts enacted during the administration of George W. Bush. Especially with its provisions on energy, however, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 sets new standards for imperfection.

The best feature of the law is bipartisan recognition that something had to be done. With the nation's economic health still unsure, lawmakers could not allow tax rates to jump back to where they were before reductions of 2001 and 2003. They also could not allow the alternative minimum tax to smack millions more middle-class taxpayers. Both major political parties would have shared blame for the consequent economic pounding. Party leaders, therefore, compromised.

Who yielded what

Democrats yielded on their insistence that rate-cut extensions apply only to taxpayers with incomes below thresholds said to distinguish the wealthy from the otherwise. And many of them must have loathed the need to sustain any product of an administration they continue to portray as thoroughly wicked. Largely for these reasons, most Republicans claimed a political victory. But they compromised, too.

The bill extends the tax-rate reductions only for 2 years. As more Republicans than Democrats understand, tax-rate cuts designed to stimulate the economy must be permanent. Now, anyone planning investments must accommodate the threat of higher taxes at the end of the extension period. The new law further salutes the notion of stimulus through tax reduction with a lower payroll-tax rate for employees. But that cut lasts only 1 year.

To reach full force as a tool of economic stimulus, a tax-rate cut should be not only permanent but also accompanied by cuts in federal spending. By that standard, the new bill technically fails. It increases spending-directly with, for example, extended jobless benefits and investment aid for wind-energy projects and indirectly with tax credits for businesses and individuals. But the dollar amount looks small in comparison with a separate $1 trillion spending bill the Senate killed as the tax compromise became law.

On balance, neither political party can gloat. Both sides saw the urgent need for action, and both compromised to make it happen. Both will fight another day over taxes and spending.

Meanwhile, neither party seems to have learned anything about the problems a government creates by making energy choices best left to markets. In addition to extending by a year a program under which wind-power developers receive taxpayer funding for as much as 30% of their projects, the tax bill reauthorizes tax credits for mandated, tariff-protected biofuels. A government that heaves public money at noncommercial energy-even after public support wanes, as it has for fuel ethanol-can't be expected to deal responsibly with the economic energy on which prosperity depends.

The oil and gas industry thus has no reason yet to think Republican gains in Congress last November mean a prompt end to one of its most trying political periods in modern memory. A test will come when lawmakers get serious about funding their spending spree. When Congress needs money, oil and gas companies should hide the cash box.

Obama's vision

Without question, Republican control of the House and gains in the Senate lower chances for realization of Obama's vision for oil and gas taxation, with its repeal of producer incentives, denial of tax breaks available to other industries, and other such horrors. But Republicans aren't yelling "Never!" about those ideas. When tax-cut push comes to deficit-reduction shove, something will have to give.

The tax bill averts economic disaster without providing sufficient stimulus, leaves in place a costly and ineffective approach to energy, and lets Obama claim new political footing characterized by compromise without having made him compromise much at all. It isn't a triumph.

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