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An Open Letter to the United States Congress: Stop Discriminatory Tax Hikes on American Energy Producers!

May 17, 2011

Dear Member of Congress:

            On behalf of the 362,000 members of the National Taxpayers Union (NTU), I urge you to oppose S. 940, the misleadingly named “Close Big Oil Tax Loopholes Act.” Introduced by Senator Menendez (D-NJ), this bill would single out oil and natural gas companies for harsh tax increases that would threaten higher energy costs as well as endanger countless jobs.

            Oil and gas companies have long been easy targets for tax hikes, chosen not for the wisdom behind the policy, so much as to pursue a misguided political narrative. For instance, in 1980 Congress passed a “windfall profits tax,” designed to capture the resentment Americans felt at the high cost of oil. As with so many tax schemes arising out of transient economic phenomena, the “windfall profits tax” became defined by its adverse results. According to the Congressional Research Service, the tax caused a measurable decline in domestic production and a rise in imports, factors that ultimately led to its repeal in 1988. Sadly, the tax hikes contained in S. 940, being sold under the guise of eliminating subsidies, indicates that the lessons of the 1980s were not learned.

            Among S. 940’s harmful provisions are a repeal of the manufacturing deduction under Internal Revenue Code Section 199 and the “dual-capacity” tax. Although many in Washington have artfully labeled these as “oil subsidies,” they are broadly available deductions aimed at creating jobs and preventing dual taxation. In fact, oil and natural gas companies only receive a 6 percent deduction under Section 199, while other domestic companies, from filmmakers to t-shirt manufacturers, enjoy a 9 percent deduction. Likewise, the “dual-capacity” protections are not industry-specific, and are designed to ensure that our domestic businesses are not double-taxed on income already taxed abroad. These and other provisions serve as tools to encourage investment, maintain our global competitiveness, and ensure affordable domestic energy production.

            Although it is clear that this legislation was aimed at the caricature of oil companies, the realities of the industry highlight the discriminatory impact the legislation will have. According to the American Petroleum Institute, oil and natural gas companies pay effective tax rates of more than 41 percent and have smaller profit margins than other manufacturers. Therefore, without comprehensive reforms to the corporate tax system, this legislation amounts to little more than a politically convenient ploy that would hurt one of our economy’s most important inputs. For the aforementioned reasons, NTU urges all Members of Congress to oppose S. 940, the “Close Big Oil Tax Loopholes Act.”

Brandon Greife
Federal Government Affairs Manager

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