Tax Reform Rule 1: Do No Harm

Mark Green
Posted August 23, 2013

Good vibrations from California with the Max Baucus-Dave Camp tax reform tour reaching Silicon Valley and a pair of high-tech sector businesses. The chairmen of the Senate’s Finance Committee and the House’s Ways and Means Committee, respectively, have been preaching a simpler, fairer tax code for individuals and job creators.  Baucus:

“There’s a reason why companies like Square and Intel call America home. It’s because we’re innovators. We’ve got real opportunity in tax reform to give innovators here in the U.S. a lift.”

Camp:

“Job creators, like these in the technology sector, are looking for a simpler, flatter, fairer tax code so they can better compete in the global marketplace. Fixing our broken tax code can make America a more attractive place to invest and hire.”

From their joint statement:

“Tax reform provides an opportunity to spark economic growth, create jobs and make U.S. businesses more competitive, both here at home and in the global marketplace. It can provide America a real shot in the arm.”

Welcome is this kind of discussion of tax reform. America’s oil and natural gas industry supports reforms that make U.S. companies more competitive globally and which help foster new energy investment. A great starting point is recognizing that in our industry and others the desire to invest and innovate already is strong, and that Job 1 for Washington is to avoid new tax increases and duplicative layers of regulation that could chill both.

For example, earlier this month two of Baucus’ Senate colleagues unveiled legislation that would use higher taxes on oil and natural gas companies to help pay for infrastructure improvements at U.S. ports. Improving harbor infrastructure sounds worthwhile, but the pitfalls of raising energy taxes have been well analyzed. Wood Mackenzie’s report found that higher oil and natural gas taxes could cost jobs and revenue to government while reducing energy production. Bernard Weinstein, associate director of SMU’s Maguire Energy Institute, in an op-ed for the Shreveport (La.) Times:

Last year, the U.S. became the world’s number one gas producing country, and within a few years we could be number one in oil production, with all the economic and energy security benefits that would follow. But placing additional tax burdens on America’s oil and gas industry, already one of the most heavily regulated and taxed sectors of the economy, won’t get us there.

Technology and entrepreneurship within the U.S. oil and natural gas industry are tied to cash flow and the ability to recover costs that support drilling the next well. Current tax policy allows companies to deduct their drilling costs in a way that recognizes the risk exposure and capital needs of the activity – and in a way that many other industries can treat similar costs. There are reasons the revolution in oil and natural gas development, through hydraulic fracturing and horizontal drilling, occurred in America.  These vast shale resources were waiting for the right mix of innovation, entrepreneurship and capital to tap their potential. IHS’ Andrew Slaughter earlier this summer:

“These unique conditions come together in the U.S. in a way that really doesn’t quite happen the same way in the rest of the world.”

Poor tax policy could seriously undermine this energy renaissance. Like finding the next drug or medical treatment, recovering costs spurs investment and economic activity. Therefore, in their tax reform effort, policymakers should first do no harm by raising taxes on our industry and others that are creating jobs and investing in America, while remaining focused on overall fairness, helping U.S. companies compete globally and improving the investment environment in this country.