Oil, natural gas ‘subsidies' are not cash handouts - Beckley, Bluefield & Lewisburg News, Weather, Sports

Oil, natural gas ‘subsidies' are not cash handouts

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Mike Hall Mike Hall
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Sen. Mike Hall, R-Putnam, was first elected to the Senate in 2006. He serves as minority leader of the West Virginia Senate and he is a Hallason LLC, Fourth Avenue Financial Advisor.

Everyone wants "tax reform." But we don't all mean the same thing when we say those words. When many of us say "tax reform," we are talking about a comprehensive, liberating overhaul of the tax code that leaves Americans less burdened by government, more productive and more prosperous. Others, though, mean rewriting certain provisions to favor their political allies and punish their perceived enemies. 

I'm afraid the current administration and its friends too often have the latter meaning in mind when they use the term "tax reform," particularly in regard to taxes paid by American energy producers. If Congress is not careful, it could wind up doing a lot of damage to the U.S. economy in a misguided pursuit of "reform" that is nothing of the kind. 

In Washington, there is a lot of talk about reducing the federal deficit. That is a positive development. However, one of the methods being discussed is to eliminate so-called "subsidies" for the U.S. oil and gas industries. That would be a negative development, and here is why. 

What some in Washington are calling "subsidies" are really small tax deductions for investments made in domestic production. These are not cash handouts. They are bipartisan tax provisions written specifically to encourage business investments that create jobs. 

This practice is not unique to energy producers. No matter your field, if your business invests in research, development or production, chances are pretty good that the federal tax code allows some level of deduction or credit for such investments. There is a very good reason for this. These provisions help stimulate economic activity and produce American jobs.

Under attack right now are two important deductions. The first is the Section 199 deduction for domestic energy production. This was passed in 2004 as part of the American Jobs Creation Act. That was no partisan, special-interest bill. It passed Congress by large, bipartisan majorities: 280-141 in the House and 69-17 in the Senate. 

Senate Majority Leader Harry Reid, D-Nev., voted for it, as did Sen. Chuck Schumer, D-N.Y. When gas prices spiked years later, Schumer called the deduction a "giveaway" for "Big Oil," and he called for exempting the largest oil companies. Why not end the deduction entirely? Because that would be too economically harmful. It is easier to scapegoat the largest companies. 

That is how the political game is played in Washington. Unfortunately, that game can hurt millions of Americans if politicians are allowed to single out specific industries for punishment.

The other so-called subsidy for American energy producers relates to the tax code's treatment of foreign profits. American oil and gas companies that have operations overseas pay U.S. taxes on their domestic profits, foreign taxes on the profits they make overseas, and more U.S. taxes if they bring home what is left of their foreign income. Thus the U.S. tax code already double-taxes foreign profits. The Obama administration would change the way those foreign tax payments are treated by the U.S. tax code to further increase the federal government's take.

But "Big Oil" doesn't pay enough in taxes, right? Not so. In May The New York Times reviewed the total taxes paid from 2007-2012 by all of the S&P 500 companies.  

"Three big energy firms paid the most taxes in absolute terms: Exxon $146 billion; Chevron $85 billion; and ConocoPhillips $58 billion," The Times reported. 

Contrary to popular belief, the energy industry pays stunningly high tax rates. The Times review found that ExxonMobil's effective tax rate over the last five years was 37 percent, Chevron's was 39 percent and ConocoPhillips' was 74 percent. By contrast, the effective tax rate for McDonald's was 27 percent and billionaire Warren Buffett's Berkshire Hathaway paid only 23 percent. The median for all companies was 29.1 percent.

It is amazing that energy companies can pay such high tax rates and still create so many American jobs — nearly 10 million. Far from being "giveaways," the small deductions they get for domestic production offset some of the dramatic tax burden this industry bears, and they direct that money back into the American economy by providing a strong incentive for these firms to invest in job-creating energy production. Scaling back on these incentives means scaling back on the jobs, and that would be a "reform" that no one should want.