In reform talks, progress or theater?

On Capitol Hill, the clock is ticking on two more major economic showdowns: tax reform and the bipartisan budget conference committee. Either or both of those initiatives could, under the right conditions, wind up creating a fairer and more efficient tax code. They could also represent yet another cynical Washington attempt to squeeze revenue from politically unpopular sources under the guise of reform or – more perversely – fairness.

With the recent release of largely partisan “discussion drafts” by Sen. Max Baucus (D-Mont.), and progress in the House trudging toward possible committee action this winter, the path to tax reform remains long and harrowing, and the details of what – if anything – will emerge from each chamber far from clear. Will the rank and file engage in this process earnestly? Or will tax reform be just the latest act of Washington theater?

{mosads}One surefire way to discern whether we’re witnessing real reform or gamesmanship is to watch the treatment of the U.S. oil and gas industry.

When Washington politicians want a ready scapegoat for our economic ills, they often attack what they derisively call “Big Oil.” They claim that oil and gas companies take advantage of preferential tax treatment to reap unfair profits at the expense of the country. The goal of such myth-making is to persuade Americans to support higher taxes on one of the most heavily taxed industries in the United States. The truth is a far cry from what we have been told by the politicians.

U.S. oil and gas companies pay far higher effective tax rates than do companies in most other industries. The New York Times analyzed the taxes paid by all S&P 500 companies from 2007-2012 and found that oil and gas companies paid an average effective tax rate of 37 percent. Lest that be viewed as an aberration, Standard and Poor’s Research found that rate to be 45 percent. The U.S. average for all companies was 29.1 percent, or 30 percent per Standard and Poor’s Research. The biggest U.S. corporate taxpayers over the last five years were oil companies. “Three big energy firms paid the most taxes in absolute terms: ExxonMobil $146 billion (27 percent); Chevron $85 billion (38 percent); and ConocoPhillips $58 billion”(74 percent), The Times reported. So much for the idea that “Big Oil” is under-taxed.

The tax “loopholes” supposedly exploited by U.S. oil and gas companies are actually provisions written not to unfairly advantage these companies, but to ensure that the industry remains competitive and productive despite the harsh economic realities inherent to their work, and to ensure that companies are able to create the jobs that have fueled our economic recovery. Take the Section 199 credit for energy exploration, for example. This was part of the bipartisan American Jobs Creation Act of 2004, which passed by huge majorities — and it is working.

Arbitrarily disqualifying oil and gas – and leaving the provision intact for the rest of the entities that utilize it – is punitive and deleterious to our economy. U.S. oil and gas companies make huge and risky investments, and those investments pay enormous dividends for the American economy. In September the Progressive Policy Institute, no right-wing champion of big business, ranked the top 25 “investment heroes” of the American economy. Eight of them were oil or gas companies. The left-leaning think tank wrote that “energy companies were by far making the biggest bet on America’s future.” New taxes, whether in the form of a Section 199 repeal or changes to the way dual capacity taxpayers employ foreign tax credits, undermine that investment.

These investments are producing economic booms in states like Louisiana, Colorado, North Dakota, Pennsylvania, and Arkansas, resulting in jobs for nearly 10 million Americans, a number that has grown considerably in the last five years, despite the fact that the economy as a whole lost jobs, and has only recently begun to add them. That is probably why Democrats left oil and gas companies off of their recent list of industries targeted for tax increases in any upcoming budget deal. Push the tax burden on this industry any higher, and the negative economic repercussions could be profound.

Tax reform is a worthy goal, but it must be done right. If it serves as cover for politicians to plunder specific industries, it will hurt the economy, cost jobs, and make the tax code more burdensome and less fair than it was when we started.

Given the huge disconnect between the vitriol directed at the U.S. oil and gas industry in recent years and the industry’s contributions to the U.S. economy, its treatment in Washington in the next few weeks will reveal whether lawmakers are serious about improving the economy or whether they want a quick and cheap political victory.     

Rafuse served as the White House energy adviser in the Nixon administration and is the principal of the Rafuse Organization, an energy, trade, and national security consulting group.. He has also worked for Unocal, an international oil and natural gas company, for 25 years.