Ryan Gets It Right

It’s a week before the election, and Washington can’t seem to get enough of “what if” scenarios. One has to do with the long-overdue task of reforming our nation’s hopelessly burdensome, complex tax code.

In a speech before the Financial Services Roundtable, House Budget Committee Chairman Paul Ryan, R-Wisc., persuasively argued that switching to “dynamic scoring” rules – which take into account possible economic growth and the resulting higher revenues that tax reform brings – could help Congress get the job done. And the speculation goes that if Republicans win control of the Senate, the idea could gain more traction in that chamber too.

Regardless of the partisan environment, dynamic scoring is a smart approach that all policymakers should embrace. But what kind of tax law changes, specifically, would show up in the dynamic scoring methodology as among the most beneficial? Many would qualify, though they certainly would include provisions that recognize the value of capital investments, avoid double-taxation of income (especially foreign earnings), don’t punish job creation, allow simple, immediate expensing and treat all industries as uniformly as possible.

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If only the Obama administration and its allies in Congress would bear these principles in mind, particularly when it comes to one of their favorite political targets for discriminatory tax policy: the oil and gas sector. As a report released just last week from the minority staff of the Senate Committee on Environment and Public Works indicates, the benefits from this industry’s “energy renaissance” have spread far and wide throughout the economy. The twin technologies of horizontal drilling and hydraulic fracturing in the U.S. are, according to the authors, “revitalizing our manufacturing sector,” “stabilizing prices worldwide,” “making significant reductions to our trade deficit,” and shielding “our citizens from the devastating energy poverty impacts being felt in European countries.”

There are other practical advantages to this revolution. For example, the report noted that in fiscal year 2012, public school districts saved almost $741 million in electricity costs and nearly $467 million for natural gas. Taking away oil and gas’s deductions, credits and other treatments that the tax system affords in various ways to other businesses would jeopardize this progress.

But even before the Senate’s report was released, there were many ways to quantify the salutary impact of the energy boom. From 2007 to 2012, employment growth in the oil and gas sector beat job gains in all other sectors of the economy, according to the Energy Information Administration. In 2011 alone, this area created 148,000 new jobs and supported 9.8 million positions, according to a PricewaterhouseCoopers report. Additional job growth is expected as the energy sector, particularly shale, continues to expand with the McKinsey Global Institute predicting the possibility of up to 1.7 million new jobs.

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Traditional energy has also fueled investment. Last month, the Progressive Policy Institute released its yearly "U.S. Investment Heroes" list, which looked at companies with the maximum level of domestic capital expenditures such as plants, property and equipment. Companies engaging in energy production or refining such as ExxonMobil Corp. and Chevron Corp. had a commanding presence on the list of 25 firms, with a combined total investment of $40 billion in 2013. Additionally, the policy institute compiled a three-year heroes list which allowed them to “see which companies have sustained their high levels of domestic spending, making long-term bets on America.” Of the 10 companies on that list, five were energy-related.

All of this activity contributes heavily to our gross domestic product. Another study conducted by PricewaterhouseCoopers found that all told, the industry’s contribution to the GDP in 2011 was $1.2 trillion, 8 percent of the national total. And when it comes to the government’s coffers, the three biggest energy firms – ExxonMobil, Chevron and ConocoPhillips Corp. – paid a combined $289 billion in taxes from 2007 to 2012 according to a New York Times report. Oil companies paid higher effective tax rates – including ExxonMobil at 37 percent – than the average rate of 29 percent for companies in the Standard and Poor's 500 index.

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We have a thriving industry in this country that provides all manner of dividends to workers, retirees living off investments, and even federal, state and local revenue departments. Yet its success is by no means guaranteed. As the Senate committee’s report points out, Environmental Protection Agency regulation of oil and gas extraction has grown by more than 145 percent since 1997. Tax policy that aims to force oil and gas to pay an artificially higher rate than other businesses could be just as destructive as excessive rule-making.

Ryan acknowledged in his speech that tax code reform will be a tough undertaking. He is absolutely right. But the whole enterprise will be seriously endangered if it starts out on the wrong foot with vindictive policies that single out some industries. Twenty-eight years ago this month, elected officials on both ends of Pennsylvania Avenue cooperated to overhaul the tax system. America cannot afford to wait any longer for a new tax reform effort, one that encourages all sectors of our economy to flourish.