Senate Finance Committee Hears Testimony on Energy Tax Reform

The experience of the 1970s and 1980s taught us that if a technology is commercially viable, then government support is not needed and if a technology is not commercially viable, no amount of government support will make it so.

Thus concluded MIT scholars Thomas Lee, Ben Ball, Jr. and Richard Tabors in their 1990 book Energy Aftermath, a retrospective on energy policy “blunders” of the 1970s and ’80s. How much mischief might have been averted in recent decades had House and Senate rules required a recitation of those words at the start of every debate on energy policy?

The same pithy, big-picture clarity came through yesterday at the Senate Finance Committee’s hearing on “Reforming America’s Outdated Energy Tax Code.” I commend in particular the testimonies of Heritage Foundation economist David Kreutzer and former Republican Senator Don Nickles of Oklahoma. Below are some excerpts from Sen. Nickles’s testimony. (Subtitles are mine.)

Best Energy Tax Reform Is Pro-Growth, Non-Discriminatory, General Tax Reform

My primary message at that hearing two years ago was that, if you do tax reform correctly, there would be no reason to hold another “energy” tax hearing, because a reformed tax code should treat energy companies and the products they produce just like everybody else. No subsidies, and no penalties. If the tax code you devise encourages investment, lowers the corporate rate, and embraces a simplified territorial system, U.S. energy companies will flourish along with all other companies.

Don’t Renew the Wind PTC

I agree with [House Ways and Means] Chairman [Dave] Camp that a few of those provisions – particularly those which encourage investment like bonus depreciation and small business expensing – should be made permanent. Others, such as the wind production tax credit (wind PTC) should remain expired. Fellow Oklahoman Will Rogers said, “All government programs have three things in common: a beginning, a muddle and no ending.” Perhaps the best example of this is the wind PTC.

The wind PTC is an overly‐generous subsidy supporting a mature industry which has expanded ten‐fold in the last decade and now accounts for over 60,000 megawatts of installed generation capacity. It is an industry that also benefits from a renewable portfolio standard mandate in 29 states and the District of Columbia, and which will further benefit from President Obama’s aggressive regulatory agenda on existing and new power plants. The wind PTC’s 2.3‐cent-per‐kilowatt subsidy is 30‐to‐50 percent of the average wholesale cost of electricity in most regions of the country. And as my friend Congressman Mike Pompeo (R‐KS) recently pointed out, the wind PTC has been around long enough – twenty‐three years – that it is old enough to drink.

In fact, Mr. Chairman, the wind PTC is so generous that in parts of the country where electricity is bought and sold in wholesale markets, wind developers will actually pay the market to take their power because they cannot otherwise collect the subsidy. This ridiculous situation is killing base‐load coal and nuclear power in those regions because they cannot afford to give their product away.

Subsidies like the wind PTC are inherently political, but I wonder how many members of this committee know that a few weeks ago the IRS issued regulations that dramatically expanded which windmills qualify for the credit? When Congress last renewed the credit, they changed the effective date to say that anyone who started construction of their wind project by the end of 2013 could qualify for the ten‐year subsidy. Originally, the IRS generously interpreted “beginning construction” to be met if the developer spent a mere 5 percent of the total project costs – hardly a high bar.

However, apparently even that was not generous enough for the President’s friends in the wind industry, so in August the IRS lowered the threshold to 3 percent (IRS Notice 2014‐46). I would encourage this committee to ask the IRS which wind projects and which companies benefited from this regulatory generosity, as well as where those companies are domiciled.

My former colleagues, the wind PTC has been around for twenty‐three years, and projects that qualified under the President’s new regulations will continue receiving the credit until 2024! Please save the American taxpayer $13 billion and let the wind PTC remain expired.

Penalizing Oil & Gas Companies Is not Tax Reform (stop repeating Carter era mistakes!)

As I previously mentioned, a properly reformed tax code also should not penalize energy companies or their products. That is a message which has clearly been lost on this President, who has year after year asked Congress to increase taxes on domestic oil and gas companies because he does not like their products. I originally ran for the Senate because I wanted to reverse President Carter’s energy policies that were hostile to domestic energy production, picked winners and losers, and stifled competition. Today I see our current President seeking to repeat many of the energy and tax policy mistakes of the Carter era.

We are experiencing a major renaissance in the domestic oil and gas industry, Mr. Chairman. The International Energy Agency predicts that the U.S. will be the world’s number one producer of oil by 2015. In 2013 we reduced our imports of oil by 15 percent and of natural gas by 32 percent. Our exports of refined products have increased 60 percent since 2010 and we are now the world’s largest combined producer of oil and natural gas.

When the President first proposed his energy tax increases in 2009, the domestic oil and gas industry was investing $232 billion. Last year the industry invested $322 billion, a 40 percent increase. This industry is the shining light in our otherwise lackluster economy, but if the President’s proposals had been enacted that amazing growth would have been threatened.

The President’s punitive proposals include denying oil and gas companies the Section 199 manufacturing deduction that all other manufacturers receive. In fact oil and gas companies already receive a smaller benefit than all other manufacturers, but the President believes even that should be taken away. He would also dramatically increase the cost of exploring and drilling by increasing the recovery period intangible drilling costs. IDC’s are the ordinary and necessary business expenses of this industry, Mr. Chairman, and they should remain immediately deductible. And the President would also like to penalize U.S.‐based oil and gas companies and disadvantage them relative to their foreign competitors by denying them a credit for taxes paid to foreign governments.

Known as the “dual capacity” provision, this proposal would cause U.S. companies to be double‐taxed and would be disadvantage them as they compete to win access to oil and gas production projects all over the world.

Real Reform

I certainly do not agree with every aspect of Chairman Camp’s plan, but I admire his courage and the tremendous amount of work he and his staff put into the effort. With regard to energy taxes, I think Chairman Camp got more right than wrong. He would end targeted renewable subsidies like the wind PTC, and preserve important cost recovery mechanisms like expensing of intangible drilling costs. He repeals the Section 199 manufacturing deduction for everyone – not just oil and gas – because they all benefit from a lower corporate rate. And his territorial international tax system would not double‐tax U.S. oil and gas companies.

Faux Reform

Unfortunately, the energy tax reform and cost recovery discussion drafts released by Chairman Baucus before he left the Senate I fear head largely in the wrong direction. Those discussion drafts would require intangible drilling costs and other company’s R&D expenses to be amortized over 60 months. Companies need to be able to expense these costs in the year incurred. Senator Baucus’ discussion drafts also took the wind PTC and put it on steroids, creating a never-ending subsidy for renewable electricity based on carbon content. I would encourage the committee to reject this unnecessary and expensive proposal.

Mr. Chairman and members of the committee, we all know that our uncompetitive tax code is badly in need of repair. The Tax Foundation just this week published a new metric which measures the degree to which the 34 OECD countries’ tax systems promote competitiveness. At the top of the list was Estonia, with a 21 percent corporate rate and no double taxation of dividend income. The U.S. ranked a miserable 32 out of 34, just barely edging out France and Portugal for the least competitive tax system. Further skewing the tax code to promote renewables at the expense of traditional energy resources will do nothing to make us more competitive.