An Honest Discussion of Energy Tax Policy

Last week, Senate Finance Committee Chairman Orrin Hatch (R-Utah) convened a hearing examining “Energy Tax Policy in 2016 and Beyond,” a continuation of the Committee’s work towards a comprehensive tax code overhaul.  The hearing was billed as an “opportunity to explore how the code affects the energy industry and what policies have the most merit as we look forward towards tax reform.”

Chairman Hatch should be applauded for taking a reasoned approach to how re-making the tax code will affect a sector so vital to the United States’ economic and energy future.  It was reflected in his opening remarks:

The energy related provisions in our tax code impact a variety of industries throughout our economy and affect the lives and livelihoods of the majority of all of our constituents.  It is therefore, important that we continually examine these provisions to make sure we’re getting things right and that resources do not go to waste.

Yet all too often, policymakers are eager to use tax reform as a tool for singling out – and punitively punishing – certain industries, typically the energy industry. In fact, the Obama administration has recently proposed a $10 increase per barrel of oil. This tax would serve as a burden on an industry that supports millions of jobs, and invests heavily in this country, leading an energy revolution. The measure would also reverse the lower gas and energy prices that American consumers are currently enjoying.

The reasoning behind this rhetoric and hostility is the misguided belief – oft repeated as fact on both the campaign trail and in the halls of Congress - that oil and gas companies receive subsidies from the federal government. Unfortunately for those spouting this “fact,” it is simply not true.

Whether deliberate or not, the terms subsidies and deductions have become intertwined.  So let’s clarify for the record.  A subsidy is a direct payment from the government to a business in order to boost its prospects. A deduction allows a business to write off its legitimate expenses.  The oil and gas companies take deductions, not unusual as as most other U.S. companies also take similar deductions when calculating their tax bill.  In fact, renewables, such as solar and wind are able to take advantage of subsidies, whereas oil and gas companies cannot.

As Dr. Benjamin Zycher, a witness on the panel and scholar at the American Enterprise Institute, noted in his testimony that while renewable subsidy supporters claim a “subsidy imbalance,” when compared to traditional energy sources, no such imbalance exists. He explained that in fact, the assumption that subsidies are needed for promising technologies in their infancy is far from accurate when the private sector has proven to be able to sustain these endeavors.

Karen Harbert, President and CEO of the Institute for 21st Century Energy (a project of the Chamber of Commerce), testified about the unintended consequences of “tax code favoritism.” She stated:

The overriding focus of any energy tax policy should be to avoid damaging one technology or industry in the pursuit of elevating another. The United States is blessed with an incredibly diverse energy portfolio, especially when compared to other countries. This diversity creates competition and thus lower prices for consumers.

Fiscal policy that seeks to penalize one form of energy or energy production detracts from our diversity, decreasing competition and increasing prices and price volatility. This is detrimental to economic growth and energy security.

Witnesses for the minority both proceeded to defend the market-distorting policies of subsidies and preferential tax treatment for favored sectors of the energy industry, and even sought to expand current law by broadening the definition of renewable energy. Doubling-down on a bad policy by increasing the beneficiaries exacerbates the effect of unintended consequences on the economy, hurting more consumers and creating yet another rent-seeking class.

That sort of thinking is unsustainable. The best way to create a truly level playing field in the energy marketplace isn’t to prop up otherwise uncompetitive sources with tax code favors. Lowered tax rates, a flatter, less complex tax code that doesn’t reward the company that hires the best accountants is the best way to give all types of energy a fair shake and jump start our flagging economy.

It’s been thirty years since Congress last attempted tax reform and it’s well past time as our current tax code is complicated and is burdensome to businesses and individuals alike. The country needs a uniform, simplified code that encourages investment, entrepreneurship and economic growth. Imposing punitive tax hikes on certain industries is not the way to achieve a thriving, dynamic energy sector.