Industries gird for battle over Obama’s proposed tax overhaul

Source: John McArdle and Gabriel Nelson • E&E • Posted: Thursday, February 23, 2012

The Obama administration today proposed overhauling the corporate tax code and lowering the top corporate income tax rate from 35 percent to 28 percent as long as the effort is paid for by slashing tax credits and closing loopholes — including many of the oil and gas industry breaks that the White House has targeted in the past.

The proposal — which would also set the top tax rate for domestic manufacturers at 25 percent and preserve tax credits for research and development and clean energy — would be the first major reform of the corporate tax code in decades.

Republicans have called for a lowering of corporate rates. But the White House plan has a slim chance of moving in an election year. Several energy insiders said the proposal is more likely an effort to spur a debate on tax reform heading into the heart of the campaign season.

Treasury Secretary Timothy Geithner acknowledged in a news conference that overhauling the corporate tax code won’t be easy.

“This proposal is designed to start the process of fundamental tax reform,” he said of the framework. “This process is going to take some time. It will be politically contentious.”

Much of the funding for the effort would come from closing fossil fuels tax preferences, according to the proposal released by the Treasury Department. The proposal includes repealing the expensing of intangible drilling costs and repealing percentage depletion for oil and natural gas wells.

President Obama outlined a slew of additional tax breaks he’s targeted for elimination in the budget proposal he released last week.

Meanwhile, as U.S. manufacturing expands, the Treasury proposal notes that “the tax code should encourage doing so in way that is sustainable and that puts the United States in the lead in manufacturing the clean energy technologies of the future.”

Geithner said the White House will begin meeting with the tax-writing committees in Congress next week to begin coming up with legislation. But the lines of debate aren’t hard to predict.

Last year, lawmakers in both the House and Senate voted down proposals to trim oil and gas tax breaks, and Obama’s clean energy push has been a subject of heightened criticism in the wake of the failure of the Solyndra solar tube manufacturing company that received more than half a billion dollars in government subsidies.

Geithner said that while it’s impossible to say right now what the final proposal will look like, the White House is demanding that all temporary or permanent tax credit extensions are paid for and do not add to the deficit.

“Some are going to say these proposals are too tough on business, and others will say they are not tough enough,” he said. “Many will fight to preserve special specific tax preferences and subsidies. “But [it's] important to remember every tax preference Congress chooses to preserve for some requires the rest of America’s businesses to pay a higher rate.”

In a conference call today, the American Petroleum Institute was already expressing concern about the proposal.

“While [a 28 percent corporate tax rate is] certainly enticing, we’re certainly concerned that industry will be asked to pay for that,” API Tax Policy Manager Stephen Comstock said.

“We don’t expect there to be much different in this proposal that hasn’t already been outlined in the president’s budget. We certainly expect to be targeted, and right now we anticipate the current exposure outlined in the budget will be $86 billion on industry, maybe more, depending on what the president outlines in his pay-fors.”

Energy companies divided

Despite today’s backlash from oil and gas companies, the broader energy industry is split on tax reform.

Some leaders of large utilities, in particular, have grown frustrated with the current tax code and are willing to do away with many credits and incentives — many of which were carved out of it through decades of lobbying by their industry.

“We would gladly see those credits and subsidies unraveled in exchange for an overall lowering of the business tax,” said Ralph Izzo, CEO of New Jersey-based Public Service Enterprise Group, during a recent interview. “The insanity of it is, Congress creates all these credits and incentives, and then they blast companies who aren’t paying taxes. Well, the reason why they’re not paying taxes is they’re taking advantage of the credits.”

Utilities, like other types of energy companies, get dozens of different incentives. There are credits for research spending, for instance, as well as for domestic manufacturing and for generating electricity from renewable sources.

The president’s proposal describes these three incentives as keepers, saying they are “important to growth and should have positive spillover effects across the economy.”

In recent years, a provision of Obama’s stimulus bill also let utilities, among other capital-intensive companies, write down the value of their power plants and other infrastructure faster than the equipment actually depreciated in value.

That incentive to invest, called “bonus depreciation,” is a major reason that large power companies such as Duke Energy Corp., PG&E Corp. and American Electric Power Co. Inc. have recently gotten large checks from the government instead of paying taxes. PG&E, for instance, had an effective tax rate of negative 21.2 percent from 2008 to 2010, giving the San Francisco-based utility a refund of just over $1 billion after it undertook a series of large capital projects.

Izzo’s company, which owns 70 percent of New Jersey’s power generation and runs the state’s largest electric utility, has told investors it expects to get $800 million in cash from bonus depreciation in 2011. PSEG got to write down investments such as the $1.6 billion it spent to spruce up the aging Mercer and Hudson coal plants with state-of-the-art pollution controls.

Corporations rarely give up government cash without a good reason, and today’s report by the White House lists the utility sector as the industry that paid the least in taxes in 2007 and 2008.

But bonus depreciation expired at the end of 2011, and the president’s proposal suggests that it shouldn’t return, eliminating the main provision that left utilities with far lower rates than usual. Now, many of them are running the numbers and finding that clearing the thicket of energy subsidies would help them as part of a broad tax reform package.

Richard McMahon, vice president of finance and energy supply at the Edison Electric Institute, lauded the president’s goal of lowering the corporate tax rate and eliminating tax breaks, though he said it was too soon to comment on the specific tax credits and incentives being cut.

“As a regulated industry, we see in general a benefit to us from this idea of simplifying taxes and lowering the statutory rates,” he said. “That’s the kind of discussion that we’ve had with our members.”

Utilities

One way or the other, electric utilities will find themselves at the center of the tax reform debate, because they tend to return value to shareholders as dividends. A tax cut for dividend income put in place by the George W. Bush administration will expire at the end of 2012 without congressional action, possibly making utility shares less attractive than stock in other industries.

Izzo said he agreed with the strategy of EEI, which wants an extension of a dividend tax cut above all. Down the line, the group could start pushing for a lowering of the corporate tax rate, as well.

“Right now, where EEI is headed is consistent with where we as a company are comfortable going,” Izzo said.

Mike Livermore, executive director of the Institute for Policy Integrity at New York University, said the offer from electric utilities is not surprising, because they do not benefit as much from the remaining subsidies as some other industries do.

But while there is broad support in theory for a plan that streamlines the tax code and gets rid of provisions that “pick winners and losers,” that comity will disappear as soon as Congress takes a serious look at making certain companies pay more than they do under the current tax code, he said.

Livermore expects a battle royal between some energy companies — such as coal, oil and gas producers — and those that lack the same portfolio of tax breaks. One question is whether heavy-hitting utilities will line up against their compatriots in the energy industry, or sit on the sidelines during what could be a bruising political battle.

“Energy producers are going to fight tooth and nail for their provisions,” he said. “Everyone else is going to moderately want a tax break, but the question is how hard they’re willing to fight for it.”

No doubt about it, “it’s going to be a fight,” he added. “We’re not going to hold hands and sing Kumbaya and figure it out.”

Click here┬áto see Obama’s proposed tax overhaul.