House Ways and Means Committee Chairman Rep. Dave Camp, R-Mich., the House tax writer, leaves the podium after a news conference on Capitol Hill in Washington.

One Big Step for Tax Reform

Dave Camp's tax reform plan isn't perfect, but it's leaps and bounds ahead of other proposals.

House Ways and Means Committee Chairman Rep. Dave Camp, R-Mich., the House tax writer, leaves the podium after a news conference on Capitol Hill in Washington.

Camp's plan, while far from perfect, is a foundation for better tax reform.

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The single best thing about the long-awaited tax reform discussion draft introduced by House Ways and Means Committee Chairman Dave Camp, R-Mich., in late February may be that it shook the nation’s policymaking establishment out of its posturing on this vital issue. Moreover, it did so in a manner rooted not in political sensationalism or finger-pointing, but rather in the spirit of a proposal that takes a realistic view of what makes our economy work.

The Camp plan is far from perfect – no tax reform measure worth its salt can escape intense scrutiny and a fair dose of criticism – but it has plenty of redeemable qualities to provide a platform for bipartisan discussion, and lays out a comprehensive first look at a program to fix a broken federal tax code that hasn’t had a serious overhaul since 1986.

There’s much to applaud in the plan. On the individual side, it would create a streamlined, broad-based system with three rates that would allow an estimated 95 percent of all taxpayers to utilize a simple tax return with a redesigned standard deduction. The remainder who choose to itemize would do so with a more comprehensible, rational list of deductions to claim. The plan would also finally bury the hideously complex Alternative Minimum Tax.

[See a collection of political cartoons on the economy.]

The corporate side of the package includes many pro-growth measures, chief among them a federal corporate rate which is reduced from 35 percent to 25 percent. This would be more in line with the current simple average for all Organization for Economic Cooperation and Development nations, most of which have been cutting their rates since 1985. Even under Camp’s plan, state corporate taxes would still keep the combined U.S. rate above that of the OECD mean.

Camp’s draft also moves away from a worldwide system of taxing the foreign income of U.S. businesses and closer to a territorial tax, a shift that would benefit the economy greatly and help remove considerable disadvantages from the outlooks of countless American companies attempting to compete in the global economy.

Taken together, these provisions are head and shoulders above the recent tax plan issued by former Sen. Max Baucus, and are on an entirely different level than the 2015 budget and tax scheme offered by President Obama. While now-Ambassador Baucus’ desire to lay down his marker on tax reform prior to leaving the Senate was admirable, the blueprint he issued did not energize the debate. And Obama’s budget, unfortunately, would move that debate backward.

[Check out our editorial cartoons on President Obama.]

This is not to say that Camp, who recently announced he will be retiring from Congress at the end of this term, got everything right. Fortunately, that’s why his document is called a “draft.” Among the items that need further caution and consideration are the way the plan would introduce new phase-outs of the low personal tax rate for certain filers, as well as its treatment of certain business sectors. This would include non-manufacturing small businesses, insurers and, critically, the energy sector. Provisions to repeal percentage depletion and so-called “last in, first out” accounting may seem like simplification, but they would actually drive up tax burdens for energy firms at perhaps the worst possible time. That’s because capital costs in this industry are set to take a huge leap.

The energy sector is a linchpin of our economic life because so much else depends on it, from manufacturing to transportation to providing reliable services like information technology.

While the president avers that oil and gas firms are reaping profits and “doing just fine,” he doesn’t tell us what is happening with those earnings. Energy companies are making a big bet on the future with job-creating investments. According to Oil & Gas Journal’s annual spending report, industry capital spending in the United States will increase 5.2 percent this year to $338 billion. Of that, exploration and drilling spending in 2014 is estimated at $250 billion, up 9.3 percent from last year.

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

The Washington-based Progressive Policy Institute singled out domestic energy firms in its most recent annual “Investment Heroes” ranking. Together, the companies on the 2013 list – such as ExxonMobil, Chevron, Occidental Petroleum, ConocoPhillips and Hess – put up a combined $56 billion. The institute observed that this spending “not only boosts output, but also creates the high-skill, high-wage jobs we need to lift the middle class and reverse today’s troubling trend toward greater inequality.”

Indeed, capital spending is a direct driver of job creation, which is why the surging energy sector has been one of the few bright spots in a low-growth economy. But can this trend go on indefinitely? Evidently not, especially if tax policy is out of tune.

Chevron CEO John Watson recently noted a “new reality” is evolving for energy producers and consumers because labor and capital costs have more than doubled in the last 10 years. Under pressure from shareholders, Shell Oil Co. and other large “majors” recently announced cuts in new investments. Total CEO Christophe de Margerie told an industry conference in Houston that costs are spiraling out of control and it’s time to rein them in. If this doesn’t add a serious measure of urgency to the tax reform discussions, nothing will. 

[See a collection of political cartoons on gas prices.]

But instead of burdening energy through an inconsistent tax structure, why don’t policymakers work together to expand the economy? There are several outdated policies and regulations that are hindering the ability of our country to maximize on the energy renaissance. Through streamlining the permitting process for approving liquefied natural gas terminals in a timely manner and repealing the crude oil export ban, the energy industry can reinvest and continue to grow the economy. Recently National Taxpayers Union endorsed just such a legislative approach from Colorado Republican Rep. Cory Gardner, one which can fulfill the promise of the shale gas revolution and make America a net energy exporter by the end of this decade.

Other legislative packages focus on facilitating careful, responsible development of energy reserves offshore and building the Keystone XL Pipeline. Among these are the “American Energy Renaissance Act” introduced by Rep. Jim Bridenstine, R-Okla., and Texas Republican Sen. Ted Cruz. The recent budget resolution crafted by House Budget Committee Chairman Paul Ryan offers further opportunities for positive progress toward a more robust energy-driven economic recovery.

[Read what people are saying about Paul Ryan's 2015 budget.]

Additionally, as production continues to expand, old policies that could use an upgrade should be reviewed. Take, for instance, the Jones Act – part of the Merchant Marine Act of 1920 – that requires only American-made (and substantially American-owned and -crewed) ships to carry products in American waters. As a result of increased production, the demand for U.S. ships has grown quickly, leaving fewer vessels available to transfer products. Modernizing the Jones Act would allow for greater efficiency, and as a result more commerce to be carried through American seas.

As far as tax laws toward energy go, Camp’s draft has the potential to move in the right direction, if effectively revised. Other measures – like those peddled by Baucus and Obama – would make our tax system less uniform, increase the financial drag on these vital industries and, quite simply, throw us into reverse.

This is a good time to once and for all drop the politically charged rhetoric about major oil companies enjoying federal “subsidies” under the tax code. What politicians are pointing to in their tax raising schemes are corporate tax deductions or cost recovery provisions that can, absent more comprehensive reforms, give American businesses a fighting chance against foreign (and often government-owned) competitors. And many of the so-called “subsidies” are the types of provisions widely used by U.S. companies across our economy, from casinos to fast food chains to software manufacturers.

[Read more from blogger Pete Sepp.]

But the White House is playing these games to score points with its base. That’s more than a little insulting to the nearly 10 million people whose jobs are directly or indirectly linked to the oil and gas industry, and likely don’t consider themselves charity cases. It’s also ironically counterproductive, since a thriving energy sector is already delivering tens of billions in revenues to government coffers every year.

Yes, the Camp tax reform program needs a bit of debugging so that it functions as a pro-growth plan for everyone. That said, it’s light years ahead of the Baucus and Obama proposals. Finally, with Camp’s discussion draft, we have a foundation on which to rebuild an outmoded tax system that is holding us all back.