During the presidential campaign, Barack Obama repeatedly vowed to force American companies to pay taxes on overseas earnings, rather than take a tax credit for taxes paid by its international operations. Eventually the White House backed down from that plan after heavy criticism from business leaders made it clear that multinationals would simply move their headquarters elsewhere, and smaller firms would simply be left uncompetitive in the global market. A similar plan has returned, the National Taxpayers Union warns, only this time it’s just targeted at the oil and energy industries — along with another tax change that would strip American companies of a manufacturing credit that keeps jobs in the US:
Congress is considering an extremely destructive “double tax,” through repealing a widely available credit that offsets taxes paid to other countries. However, this new “double tax” would apply only to energy providers here in the U.S. – meaning state-owned companies in countries like Venezuela and China will effectively receive a competitive edge over American firms. Ironically, even BP – the target of Congress’s ire over the Gulf spill – will gain a tax advantage. Also under consideration in the U.S. Senate is a repeal of Section 199 of the U.S. tax code, a manufacturers’ deduction, for only the oil and gas industry. The deduction allows companies to reinvest revenue into creating jobs and domestic economic growth.
The two provisions help to offset the high rates and complexity that make the U.S. corporation income tax system one of the most burdensome in the industrialized world. Repealing them would not only hurt one of the few relatively well-performing sectors of our economy, it could also signal a new wave of punitive tax policies aimed at politically convenient targets. Furthermore, with heavier across-the-board burdens looming due to inaction on extending the 2001 and 2003 taxpayer relief laws, the prospect of a recovery is already tenuous.
“These proposals have nothing to do with ‘fairness,’ ‘accountability,’ or responsibly reducing the federal budget deficit; instead, they are about imposing a double tax and an unfair burden on an industry that employs or supports over 9 million Americans,” said NTU Executive Vice President Pete Sepp. “The oil and gas sector provides abundant and diverse sources for the energy that fuels the rest of the U.S. economy. Raising costs on energy producers also means raising costs on small businesses and American families at a time when no one can afford it.”
The NTU will put its money where its mouth, or press release, is. They have committed to $4 million in ad buys on cable news networks and local television in selected states to make its point:
Both of these changes are a problem for the energy industry and consumers. As the NTU points out, eliminating the Section 199 tax credits removes incentives for American companies to keep jobs at home. That’s the exact opposite direction of Democratic rhetoric, which usually refers heavily to “outsourcing” jobs on the global market. They will keep Section 199 in place, but exempt oil and energy companies from applying it to their own tax returns.
Guess who pays for the higher costs? Hint: It’s not the CEO. The tax credit on foreign taxes paid will force US producers in both industries to raise prices to meet the costs of the loss of the credit. Since energy prices are a multiplier in the distribution chain (each player in the chain will have to add the higher energy costs incurred to bring goods and services to market), this will be both inflationary and regressive. Those with fewer discretionary dollars will feel the impact the most, just as with cap-and-trade, and for the same reasons. Higher prices also mean that American producers will be less competitive in global markets, and that means lower revenues and loss of jobs.
Earlier today on The Ed Morrissey Show, I spoke with Pete Sepp about the tax proposals. We both agree that this is just the start; if Congress gets these tax proposals in place, the oil and energy industries won’t be the only sectors to have the grasping hands of Congress go deeper into their pockets. Be sure to watch, and to follow at NTU for more developments as they come.