In business-speak, a cash cow is a commercial activity that, after an initial capital investment has been paid off, continues to generate income and profits for years to come with little or no additional expense.
In political-speak, cash cow refers to an industry that can be milked for taxes seemingly without limit. The prime example today is the U.S. oil and natural gas industry. Despite its strong growth, robust job creation, huge annual payments into the U.S. Treasury, and vast sums spent on developing new supplies, Washington apparently thinks that energy producers can and should be milked dry.
Its a metaphor for the dairy cow that continues to produce milk over the course of her life. The cow does most of the work.
It should be no surprise that legislation designed to elicit campaign contributions from individuals and groups threatened by some new public policy is called a milker bill on Capitol Hill.
President Obamas $3.9 trillion budget proposal for fiscal year 2015 envisions new revenues amounting to $1 trillion over the next decade, mostly coming from tax increases. The presidents plan reprises his yearly call for higher taxes on oil and gas producers, whichoddly enoughis part of his ill-conceived all of the above energy policy.
He has for years mischaracterized legitimate, congressionally enacted tax deductions as subsidies and claimed that the oil and gas sector could easily bear a much heavier tax burden. The tax reform package introduced by Sen. Max Baucus (D-Mont.) takes a similar, if somewhat less of a red meat approach, to energy companies.
Although a tax reform proposal floated recently by Rep. Dave Camp (R-Mich.), chair of the House Ways and Means Committee, seems at the moment to be a reasonable alternative worth considering, it, too, singles out specific industries, like domestic energy producers, for differentially high tax bills.
But, thats true already.
A survey published last year by the New York Times showed that major energy firms typically pay high rates. Looking at data from 2007 through 2012, the Times reported that U.S. energy companies federal, state, local and foreign tax bills averaged 37 percent of taxable corporate income, while the effective income tax rate for S&P 500 companies as a whole was 29.1 percent. And, a recent study by the Washington-based Tax Foundation finds that the effective tax rate imposed on multinational corporations based in the United States, including our largest oil and gas companies, is extremely high and, in fact, the highest in the world since Japan lowered its taxes on multinationals headquartered there.
Because of the shale oil and gas boom, governments have become ever more dependent on energy tax revenues. Between 1981 and 2008, again according to the Tax Foundation, the oil industry paid more than $388 billion to the federal and state governments in corporate income taxes, but they paid almost twice that amount, $683 billion, to foreign governments. Analyzing federal energy data, the Tax Foundation showed that governments here and abroad are hugely dependent upon the direct and indirect taxes paid by the largest consolidated oil companies, and that between 1981 and 2008 these tax payments exceeded corporate profits by 40 percent.
While energy companies pay very high taxes, they also plow their earnings back into research, exploration and new infrastructure. Money spent on drilling, transport and refining are key drivers of growth and job creation. In the exploration and production sectors alone, investment bank Barclays Capital predicts that U.S. oil and gas firms collectively will spend $156 billion next year, up 8 percent from $144 billion in 2013.
Such facts explain why major U.S. energy companies were recognized last year as Investment Heroes by the Washington-based Progressive Policy Institute. That organization reminds us that, a high-growth strategy requires strong investmentprivate and publicin our nations productive and knowledge capacities.
As we enter into the necessary debates and discussions on tax reform, the one thing that should not be in dispute is that our system is in dire need of a root-and-branch overhaul. Camps bill is a great start. Yes, there are things in it that should be reworked to level the tax playing field. Repeal of Last In First Out accounting or oil and gas depletion allowances, for instance, adversely impact the energy sector.
America can no longer afford a business-as-usual approach in a world in which competition increasingly is global. People on the left, who disparage American exceptionalism, argue that we should look to Europe for public policies to adopt here. If so, we should mimic tax policies in the rest of the world that do not punish investment, job creation and business expansion, especially in a sector that the United States, owing to the shale revolution, is poised to dominate.
If were going to do tax reform, lets do it right.
|William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.|