Do tax reform right

Make sure it doesn’t damage Pennsylvania’s economy

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Pennsylvania’s unemployment rate has dropped to 6.0 percent, the lowest level in four years. The national economy is also improving — the latest data show unemployment at 6.3 percent, more than a full point lower than this time last year.

Federal lawmakers could help ensure that all these numbers continue to improve by simplifying the tax code. But only if they’re smart about it.

It’s no secret that our tax code is in desperate need of reform; it was last overhauled in 1986.

Over the last two years, thanks to the efforts of former Sen. Max Baucus, D-Montana, and Rep. David Camp, R-Michigan, many thought tax reform was on the horizon. Both men sought to boost economic growth through a simplified code and lower rates.

But then Mr. Baucus resigned to become ambassador to China. And Mr. Camp announced he wouldn’t seek re-election. So tax reform has almost certainly been shelved.

Fortunately, these lawmakers helped lay out a blueprint for intelligent reform — and provided examples of how not to go about tax code restructuring.

Both the Camp and Baucus plans would lower the corporate tax rate below its level of 35 percent. And Mr. Camp’s plan would shift the way income earned overseas is taxed so that U.S. companies would be better incentivized to compete internationally. These two pro-growth changes are admirable reforms that future lawmakers must emulate.

But each proposal also would cut crucial deductions for the energy industry, thereby crippling this vital economic sector.

Take Section 199, a provision that allows oil and gas companies to deduct 6 percent of their approved manufacturing expenses so they can afford their high up-front costs. While Mr. Baucus’ plan would keep this essential deduction, Mr. Camp’s reform would obliterate it.

Both lawmakers’ plans would eliminate a deduction that’s essential for small oil and gas producers. Because of the high up-front costs of drilling and maintaining a well, independent producers rely on something called “percentage depletion” to preserve earnings. These manufacturing deductions help companies make further investments in our domestic energy sector.

Additionally, the Baucus and Camp proposals would prohibit the use of last-in, first-out accounting. Since 1938, companies could use either LIFO or FIFO (first-in, first-out) methods to account for inventory costs. This distinction is important because the LIFO method allows companies to calculate their net profit — and taxable revenue — using inventory that is valued at its most recent price. Repealing this accounting method would retroactively increase taxes for oil and gas companies.

Tax hikes that target oil and gas overlook the huge contribution the industry already makes to federal coffers. ExxonMobil and Chevron paid a combined $51 billion in income taxes in 2012 — making them the biggest U.S. corporate taxpayers. At 44.3 percent, the industry’s effective tax rate is higher than any other.

It’s hard to overstate the growing importance of the oil and gas industry to Pennsylvania’s economy. Over the past few years, the industry created 239,000 jobs either directly or indirectly in the state, according to the Pennsylvania Department of Labor. These quality jobs pay about 30 percent more than average. And nationwide, while the overall number of jobs climbed just 6 percent in the past four years, they jumped 32 percent in the oil and gas extraction sector.

There’s no question that tax reform is desperately needed. The current code is ridiculously complex and wasteful. Simplifying the code, smartly, could give our economy a much-needed boost.

Nick Tortorici is president of Allegheny College Republicans.

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