The Right Way and the Wrong Way to Fix Energy Taxes

Reforming tax policy and energy policy can be a win-win for our economy, as long as policymakers do it correctly.

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Pete Sepp is executive vice president of the National Taxpayers Union.

Another federal income tax filing day has passed, and with it a litany of calls for "fixing" our hopelessly broken tax code. Much like any reconstruction, however, there's a right way and a wrong way to do the job. Nowhere is this more important than in the way we modify tax laws affecting energy production and consumption.

Since this is, after all, a commentary on Washington, D.C., it's best to start with the wrong way. That would be much of what the White House and its allies propose. The president's plan starts off decently enough by seeking a reduction in the federal corporate tax rate from 35 to 28 percent. But then the problems creep in, including serious tinkering with the Section 199 domestic production tax write-off. In this area, the standard amount of the deduction could be as high as 10.7 percent of qualifying activity (even more for "advanced manufacturing") or as low as 0 percent.

[ See a collection of political cartoons on energy policy.]

Who's the unfortunate producer on the 0 percent end? None other than the president's perennial political target, the oil and gas industry. Of course, joining in the misery is a lot of company: over 9 million people whose jobs are related to or supported by oil and gas; some 100 million households that own passenger vehicles; and more than 50 million households invested in various mutual funds, individual retirement accounts and other vehicles holding oil and gas stocks. They could be hurt by the "trickle-down" tax hike thanks to a 0 percent deduction in a variety of ways, from less secure employment to higher prices at the pump to moribund returns on retirement portfolios.

Adding to the pain is the president's announced intent to strip oil and gas firms of the "dual capacity" credit, another widely available provision that helps protect U.S. companies with earnings abroad from double taxation. I write "helps protect" because neither Section 199 nor dual capacity can make up for other parts of our Byzantine tax system that make it one of the least competitive in the developed world.

The president and his advisers don't seem willing to recognize that proposing discriminatory tax hikes while advocating a "fairer" tax system is a contradiction. Instead, they just double down on the harsh rhetoric, the latest of which is aimed at what they call "speculators."

[ Read the U.S. News debate: Is Obama's Corporate Tax Plan A Good Idea?]

Thankfully, there are alternatives that chart the right way out of the tax law thicket and point us toward a simpler system that treats all forms of energy production the same. One such plan, introduced in Congress by Republican Reps. Mike Pompeo of Kansas and Raul Labrador of Idaho, would hit the "cancel" button on numerous energy-specific tax carve-outs and simply reduce corporate taxes across the board in an amount consistent with the sum revenue total involved in all these current federal programs. Equally important, the bill avoids the political game of rewarding friends and punishing foes by leaving the Section 199 deduction and dual capacity credit open to any qualifying business, regardless of industrial sector. These provisions might someday no longer be necessary if elected officials cut tax rates further and switch to a more competitive "territorial" taxing method.

In a letter of endorsement for the Pompeo-Labrador Energy Freedom and Economic Prosperity Act, a colleague from my organization wrote:

The current practice of bestowing competitive advantages upon politically favored energy sources not only allocates capital away from more efficient uses, but also crowds out private-sector investment in other technologies that may be more commercially viable. Indeed, history has shown Washington has a poor track record of picking winners, which has resulted in higher energy costs and less innovation than had free-market principles be allowed to operate.

Reforming tax policy and energy policy can be a win-win for our economy, as long as policymakers respect the principles embodied in the Energy Freedom and Economic Prosperity Act. Following the White House's way, on the other hand, would mean a double-loss.