At nearly 74,000 pages, the U.S. Tax Code is a bloated, destructive and unwieldy mess.
It demands fear and inspires loathing more than respect. Accidentally violate it, and you encounter bureaucratic revenge and pay a debilitating fine; do so willfully, and you also serve prison time.
It answers unasked questions: “What happens to citizens when Congress exercises nearly unlimited authority to enact creative and continuous financing schemes to support its insatiable appetite for spending?” And, “Why are not Congress and congressional staff members treated the same way as every other citizen under the tax laws they enact?”
To individual Americans — and to the large and small businesses that employ them — the tax code is no joke. Even most politicians admit a major overhaul is past due — and they have powerful incentives to act.
For the fourth consecutive year, no budget is in place and the fiscal year starts in days. With elections looming and its ability to borrow presently curtailed for having once again reached its “debt ceiling,” Congress has powerful incentives but do the members have the political will?
And, just as importantly, do they have the intellectual restraint to carry out this debate productively and politically honest manner?
Reforming the U.S. Tax Code will be a long, hard process featuring heated and boisterous debate. Given the generational import at stake — and the healthy deliberation our democracy demands — this is perfectly appropriate; at its best, it would be reminiscent of the debate over adoption of the U.S. Constitution. We can only hope that both sides argue skillfully and truthfully about their positions.
The foundational principles upon which the tax reform movement is based must be simple to articulate and easy to defend.
The following goals — missions — should guarantee appeal: simplify the law; apply it fairly; broaden the tax base; stabilize the deficit and ensure that the United States remains (or regains its position) as a desirable place to create, encourage and maintain business.
Once, those were sacrosanct principles. Be independent, not tempted by political bias and motivation and never wield taxes as a punitive weapon in a war of ideologies.
Now, however, they must be reiterated, fought for and prayed for. Otherwise in the coming debates the oil and natural gas industry will continue as the target of choice for politicians of all stripes.
The energy sector is where lawmakers on both sides of the aisle delight in misdefining and taking creative liberty with the definition and applicability of certain tax terms.
“Subsidy,” “deduction” and “credit” are the three most frequent victims of this practice, which is attributable either to simple ignorance or political convenience. To be certain, this dynamic is most evident in the long-running effort to increase taxes on U.S. oil and companies by referring to their deductions and cost recovery measures as “subsidies.”
At the same time, tax-law subsidies go to “green” companies by the billions of dollars, and are labeled “investments.” According to the law, a subsidy is a direct payment from the government to an entity to increase its economic viability (think of the wind, solar and electric car industries).
A deduction spelled out in the tax code, on the other hand, is intended to ensure that a U.S. firm is taxed only on its actual income earned in the United States and not double-taxed after paying taxes to other countries in which it does business.
One absurd example of definition-twisting in which some advocates identify and call out oil industry “subsidies,” is The Environmental Law Institute’s recent categorization of the Low Income Heating Energy Assistance Program as a subsidy to oil and natural gas companies.
This is absurd; LIHEAP has long been a sacred cow to lawmakers on both sides of the aisle — because it subsidizes individuals seeking to heat their homes.
In an equally far reach, Oil Change International, meanwhile, singles out a large section of the Pentagon budget directed to defense of oil overseas as, again, a subsidy paid to U.S. oil companies.
These are gross mischaracterizations not just of these individual provisions, but of the general concept of a subsidy. It is flexible semantics at its worst and it is toxic to any earnest effort to enact worthwhile tax policy.
While a subsidy is characterized by a direct payment from the government to an entity designed to increase its economic viability — as seen in the wind, solar and electric car industries — a deduction is intended to ensure that a U.S. firm is taxed only on its actual income.
Tax Code provisions include deductions for both U.S. businesses and American individuals; deductions recognize and take account of legitimate expenses and are key to calculating tax liability, preventing double-payment with its anti-competitive implications and ensuring that a company can rely on a predictable investment environment as it seeks to compete both at home and abroad.
Assailing legitimate business accounting formulas — like Section 199 manufacturing credits or protections for dual capacity taxpayers — as “oil subsidies” is, as I have pointed out in the past, factually inaccurate. It’s also deleterious to the U.S. energy industry, its job-creation power and our economy as a whole, given the manner in which such rhetoric undermines the vital mechanisms that make the arcane U.S. tax code navigable.
It is vital, as Congress engages in tax reform and seeks to fund the U.S. government beyond the looming fiscal deadlines, that policymakers resist the strained rhetoric that has for so long plagued the debate over corporate taxation in the United States.
If Congress wants an honest and informed debate about the future of energy tax policy, it must accurately portray the tax treatments in question. And, rather than penalize, it should be thinking of ways to help U.S. companies be more effective, economical, and competitive. Only that approach will add high-paying jobs and new resources to boost the nation’s economy.
Jack Rafuse served as the former White House energy adviser and is the principal of the Rafuse Organization. He has also worked for Unocal, an international oil and natural gas company, for 25 years.