In an attempt to combat America’s inexplicably complicated tax code, Sens. Wyden (D-Ore.) and Coats (R-Ind.) have introduced the “Bipartisan Tax Fairness and Simplification Act of 2011,” S. 727. Looking to bring down the corporate rate to 24 percent from 35 percent, currently the world’s highest rate, the bill offsets the cost of that reduction through various repeals and modifications. While reducing the corporate rate is a laudable goal, S. 727 does so at the expense of America’s energy companies—repealing or modifying key tax policies employed by the industry.
Decreasing International Competition
Modification of Dual-Capacity:S. 727 would limit the foreign tax credit for large integrated oil companies resulting in double taxation for American based companies. In order to keep American oil and natural gas companies internationally competitive and to encourage them to bring earnings back to the United States, US tax rules allow for these companies to employ a tax credit equal to the amount of income taxes actually paid to foreign governments. S. 727 exposes these profits to international double taxation.
Unnecessarily crippling US based energy producers, American oil and natural gas companies would be forced to pay higher tax rates than their international competitors. Unable to compete with foreign, state-owned companies, American oil and natural gas companies would inevitably have to scale back development of international markets. With thousands of American jobs buoyed by foreign exploration, S. 727 would necessarily result in domestic job loss and increase our dependence on foreign oil.
Inhibiting Domestic Production
Percentage Depletion Repeal:Percentage depletion allows oil and natural gas producers to deduct the gross income derived from extracting fossil fuels—S. 727 would eliminate this method of cost recovery. Without this tax policy, it may take years for oil and natural gas companies to recuperate their investments needlessly tying up capital that could be used for other job creating projects.
Section 199 Repeal:Section 199, the Domestic Production Activities Deduction, benefits all companies who produce goods on American soil. Currently, American energy and natural gas companies are able to deduct six percent of their profits from their taxable income the year they were earned. S. 727 would repeal Sec 199 for all companies upending longstanding tax policy.
Supporting more than 9.2 million domestic jobs, America’s oil and natural gas producers are a pivotal part of the American economy. Although tax reform which lowers rates, broadens the base, and simplifies the code is necessary, conservatives should be wary of legislation that does so at the expense of one of our nation’s most productive industries—energy producers.