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Why Budget Politics Matter | Commentary

Early this month, President Barack Obama released his fiscal 2015 budget blueprint — a document that would look familiar to anyone who has reviewed the budgets of preceding years. The document — and the administration — takes the position that we need to address and resolve the challenges of our tax code. What are needed now are substantive steps to make tax reform a reality. Political talking points need to be transformed into meaningful reforms.

Clearly real tax reform that drives economic development is needed, but it remains a long shot. Michigan Republican Dave Camp, chairman of the House Ways and Means Committee, recently introduced a package that deals in the kind of specifics that can make reform a reality. His approach stands in contrast to that of the administration, of course.

The administration’s proposal includes new taxes on energy producers. This is a bad idea. The introduction of new taxes — perhaps billions of dollars in new taxes — in the energy area would be counterproductive and harm the economy.

That the administration’s proposal is so different from Camp’s makes real tax reform a long shot. But long shot or no, if reform is to be successful in making an economic difference and advancing the debate, it has to address policy that supports our energy future. A recent report from the International Energy Agency titled “Oil: Medium-Term Market Report 2013” makes the case for policy that supports the development of new technology in our energy companies — renewable and fossil — along with their business expansion and their contributions to job growth.

The value of a close reading of the IEA report is its support for policy that enables U.S. oil and gas companies to prosper.

The administration’s budget plainly contains no good news for the energy sector; its proposals for the energy industry would discourage the innovation and job growth that the IEA report outlines. Existing policy in the U.S. includes Section 199 of the U.S. tax code and the “dual capacity” rule of U.S. tax code. Section 199 permits a tax deduction for businesses that operate domestically in the manufacturing and production sectors. A number of industries receive the deduction, from coffee makers, movie production companies, to renewable energy companies. Section 199 is part of the American Jobs Creation Act of 2004; it encourages investment in domestic manufacturing, and it leads to job growth.

The dual capacity tax rule was created in the 1980s, and it primarily applies to the mining and oil and gas industries. It is applicable where these companies must pay a levy to the local government in order to do business there. For the levy to qualify as a foreign tax credit that can be deducted for U.S. tax purposes, the company must demonstrate that the levy is a tax and not paid in exchange for specific economic benefit. The dual capacity rule avoids what would otherwise be double taxation on U.S. companies in this sector that operate abroad.

The investment required for developing energy is high; last year the energy industry invested more than $56 billion. What has been the impact of new technology on the oil and gas industry? The IEA report states it this way: “What makes the tight oil boom truly transformative is not just the sheer production volumes … [it is] the economic and market impact of the new production, and the chain reaction it is creating in the global transportation, storage and refining infrastructure.”

The IEA report goes on to point out that neighboring countries like Mexico can also engender industry expansion via revised tax policy; the report points specifically to Mexico and the potential for expansion of PEMEX with revised policy.

Fair and equitable policy matters. So does policy that encourages job growth. The IEA report makes clear the transformation of the U.S. industry under current policy, “newly minted U.S. midstream companies, typically set up as Master Limited Partnerships with substantial tax incentives, have presided over a rapid expansion in transport and storage capacity in the U.S. …” Among the many benefits of that expansion has been the domestic job creation from the industry. This sector’s technology-driven expansion and the ensuing job growth remain especially important in the face of the recent report of generally weak U.S. job growth.

This may be a challenging time for any real tax reform, but, if it is to occur, it should include fair and equitable tax policy that encourages economic development with commensurate benefits for the workforce.

Larry E. Penley, PhD, is the president of the Thunderbird School of Global Management, the oldest and largest graduate school for international business in the United States, located in Glendale, Ariz.

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