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Op-Ed: Change the Tune on Taxes

"Don't ask me what I want it for, if you don't want to pay some more." Those lyrics, from the immortal Beatles song "Taxman," seem to sum up the attitude of too many lawmakers on Capitol Hill. Look no further than legislation from Sen. (and presidential candidate) Bernie Sanders, I-Vt., and Rep. Keith Ellison, D-Minn., which, they claim, would "close tax loopholes" and "eliminate other subsidies" for the oil and gas industry.

If these lyrics sound familiar, it's because they are, and the tune is getting tiresome on the ears of taxpayers, who would rather hear something more upbeat about overhauling a tax system that is giving just about everyone a serious case of the blues.

A handful of the dozens of items in the Sanders-Ellison bill make sense. Their call to eliminate the $100 million Ultra Deep Water research program is echoed in a joint report on transpartisan deficit reduction opportunities published by my organization, National Taxpayers Union, with U.S. Public Interest Research Group. We also recommended ending energy research demonstration programs even-handedly, instead of just picking on one sector as Sanders and Ellison do.

But elsewhere, the two lawmakers' message becomes conflicted. They propose to get rid of taxpayer-backed loans, guarantees and other instruments in federal programs like the Overseas Private Investment Corporation and the Export-Import Bank, but only when they involve fossil fuels. That means Solyndra-style "green energy" debacles would continue to plague taxpayers, as would counterproductive Ex-Im finance deals for mega-businesses like Boeing. Government should be less, not more, involved in the game of picking winners and losers in the private sector.

On tax policy, Sanders and Ellison likewise fail to take an even-handed approach. The centerpiece tax hikes in the bill would come from stripping oil and gas of cost-recovery techniques in the tax code that are either available to a wide range of actors in the economy or have equivalents in many industries. Two of the bigger examples are denying the section 199 job-creation deduction to oil and gas, which qualifying domestic manufacturers of all types can claim, and getting rid of "last in, first out" tax accounting for fossil fuel companies. As I said in testimony last month before the House Small Business Committee, this decades-old method is not just about big petroleum concerns – many medium- and small-sized firms that must keep large inventories of various goods on hand have employed it.

Ironically, even as the sponsors of the bill labor to show otherwise, the oil and gas industry already pays more than its fair share when it comes to taxes. Exhaustive research indicates that energy companies pay a higher average tax rate than others in the S&P index. Nor should their contributions of jobs and investments be overlooked. Even the president's Council of Economic Advisers seemed to acknowledge these gains in its latest economic report. The council found that "The U.S. energy revolution has contributed to economic growth, both in terms of economic output as measured by GDP and overall employment." It's oil and gas leading that revolution, by the way.

Yet, the taxing obsession remains all too common. Former Senate Finance Committee Chairman Max Baucus, D-Mont., targeted the energy sector in his quest for tax reform. Earlier this year, Treasury Secretary Jack Lew singled out oil and gas for inequitable tax rates in a Brookings Institution speech. And Sen. Edward Markey, D-Mass., recently introduced a bill repealing the excise tax on medical devices by closing tax code "loopholes" for oil and gas. Such a twisted calculus has to change, for the sake of streamlining and simplifying the entire tax system for all Americans.

In their efforts to tackle this vital task of tax reform, Senate Finance Committee Chairman Orrin Hatch, R-Utah, and Ranking Member Ron Wyden, D-Ore., have held multiple hearings and established working groups to examine existing tax law and make legislative recommendations to the committee. Hatch and Wyden also solicited input from the public, which have yielded 1,400 submissions from a range of business groups and trade associations.

In submitting its detailed comments to the business tax working group, National Taxpayers Union urged the committee to reject proposals that misuse reform as an opportunity to boost tax burdens through closing so-called "loopholes." We warned that by basing tax policy on vindictiveness toward politically out-of-favor businesses, "principles such as rule of law and a level playing field for all Americans become trivialized. In turn, the entire tax system itself is jeopardized."

Another illustration of this decay is the array of proposals from lawmakers and the president to strip away a deduction for foreign affiliate reinsurance activities. While it sounds complicated, this revenue-raising scheme would "penalize a common practice that has diversified financial resources against mega-disasters and helped to keep insurance rates reasonable for consumers." A recent study by renowned economist Art Laffer and Peter Ferrara quantified the damage that singling out reinsurance for tax hikes could have, projecting private sector losses of more than $4 for each dollar of government revenue raised.

To end the way this piece began – on a musical theme – policymakers should beware of singling out and punishing anyone through the tax system. Just ask Bono of the Irish supergroup U2, who in a recent Sky News interview defended the band's decision to locate part of its business in the Netherlands instead. Typically known as an advocate for what some would call liberal causes, the singer said, "we think it is our sovereign right to be tax competitive ... [B]ecause I'm an activist, people think you should be stupid in business. I don't run with that."

Businesses and people do, however, "run" from what they perceive to be arbitrary tax laws, by locating to financial climates that are less harsh. That's a lesson in competitiveness every taxman needs to learn, whether he's in England, Ireland or the United States. 

Pete Sepp is president of the National Taxpayers Union.

Source: US News & World Report

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    Response: essays
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