Don’t Be Fooled By “Tax Reform” That Raises Taxes On Energy And Raises Prices At The Gas Pump

By Dan Greenberg, Advance Arkansas Institute: There aren’t many Arkansans who think gas prices are too low. But a new federal tax proposal threatens to force fuel prices even higher.

Last month, two respected U.S. senators introduced legislation intended to cut taxes, spur economic growth, and reduce the interference of the tax code in our economy. The Wyden-Coats Bipartisan Tax Fairness & Simplification Act of 2011 would enact many worthwhile tax policies – such as reducing and simplifying tax brackets, lowering the corporate tax rate, and getting rid of the alternative minimum tax. But one deficiency in the Act demonstrates an important lesson of tax reform – namely, that just one change in the tax code that gets the details wrong can counterbalance the good effects of praiseworthy policies:

Regrettably, the Act’s proposed elimination of the dual-capacity tax deduction for U.S. oil and natural gas producers would not only make our economy less productive and our tax code more unfair, but could also raise fuel prices and threaten America’s energy security.

Essentially, the current dual-capacity rule lets companies that produce energy offshore deduct the taxes they pay to foreign governments from their U.S. tax bill. This double tax burden is not borne by foreign competitors, because a dual-capacity deduction is standard practice just about everywhere in the world. The countries that tax foreign profits (most do not) also allow some kind of deduction to protect their national energy producers from double taxation. But the Wyden-Coats proposal to eliminate this deduction will subject U.S. energy producers to a new tax that puts them at a huge competitive disadvantage.

The point of the dual-capacity rule is to offset the special tax on energy producers that some countries establish that is above and beyond the normal corporate income tax. In Norway, for example, the standard corporate tax is 28 percent, but the additional oil company tax is 50 percent. The standard foreign tax credit allows companies a credit for the 28 percent tax, but not for the 50 percent tax. Without a dual-capacity rule, American companies doing business in Norway would face additional tax liability above the 78 percent tax they currently must bear.

In short, dual-capacity is a substantive policy designed to place U.S. companies on an equal financial footing with the gigantic, state-subsidized oil firms of other nations. In no sense is it a loophole or a special privilege. Without this deduction, American firms will face extraordinary obstacles when competing for the global energy reserves coveted by developing economic powers like China and Russia. Removing this deduction from our tax code would not only be unfair, but would also make for a more inefficient and less productive economy.

Ensuring that our nation has access to an appropriate share of the world’s energy supply is crucial to our economic future. Our domestic energy production continues to improve (in spite of ongoing restrictions on where energy companies can explore and drill), but we depend on foreign oil to power our transportation system and industrial output. We all know that our need for oil will not diminish in the near future, even if we make very optimistic assumptions about alternative energy technologies.

Without a dynamic U.S. oil and natural gas industry, our economic recovery will be thrown back into first gear. Even at our highest level of unemployment during the recent recession, the oil and natural gas industry still supported jobs for more than 9 million Americans, and the fuel they produced enabled other industries to preserve other jobs as well. Surrendering competitive advantages to foreign energy producers by raising taxes on our own companies would be unwise and counterproductive.

Our best defense against rising fuel prices and unstable supplies is a strong U.S. energy industry that develops energy resources both here and abroad. The primary effect of eliminating dual-capacity would be to increase the leverage of our economic rivals and foreign oil states.

Tax hikes like these often are based on politics more than policy: they are typically motivated by anger towards energy companies because of high prices at the gas pump. But making it harder for the men and women who extract oil from some of the most dangerous places on the globe (the jungles of Africa, the North Sea, and the Arctic Circle) to do their jobs isn’t going to lower gas prices or, in the long run, increase tax revenue. In the U.S., government already collects significantly more in taxes from oil companies than the profits those companies give their shareholders; charging these companies more taxes will have a dangerous ripple effect on jobs, the economy, and fuel prices.

Again, the Wyden-Coats plan contains many good tax reform policies that would create a stronger, healthier, and more productive economy. But its proposal to do away with a free-market, pro-growth tax policy measure like dual-capacity is a terrible idea. The dual-capacity portion of the tax code should be left just as it is.
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Dan Greenberg, a lawyer and former state legislator, is President of the Advance Arkansas Institute.

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