The President’s Energy Tax Hikes: Section 199 Deduction

Mark Green
Posted February 14, 2012

The president’s State of the Union address last month had lots of good stuff in it about domestic oil and natural gas production. Unfortunately, the president’s actions are speaking louder than his words.

His just-released 2013 budget includes proposals to increase taxes on oil and gas companies – more than $86 billion over 10 years – that would take the country in the wrong direction on energy. Research shows higher energy taxes would discourage production, lead to fewer well-paying American jobs and increase our reliance on imports.

Today, let’s take a look at one of his tax-hike proposals – repealing the Section 199 manufacturer’s deduction only for oil and natural gas companies. Benefit to Washington: $11.6 billion over 10 years.

Here’s what the president said back on Jan. 24:

“Let’s remember how we got here.  Long before the recession, jobs and manufacturing began leaving our shores.  Technology made businesses more efficient, but also made some jobs obsolete.”

Indeed, which is why the 2004 “American Jobs Creation Act” included the Section 199 deduction. It was extended to all U.S. manufacturers, to help address the very problem the president identified by benefiting employers who maintain and create well-paying U.S. jobs.

The president went on to talk about tax policies he said would foster more American manufacturing:

“If you’re an American manufacturer, you should get a bigger tax cut.  If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here.  And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.”

Too bad the president’s affinity for American manufacturing is more rhetoric than reality – demonstrated by his renewed proposal to eliminate the Section 199 deduction only for American oil and natural gas companies. Talk of tax fairness from the administration is especially hollow here. Under Section 199, a 9 percent deduction is available to all qualifying income from all domestic manufacturers – except that the deduction for the oil and gas industry is limited to 6 percent, and now the president wants to eliminate that.

If the objective, as the president said, is more domestic oil and natural gas production – creating more U.S. energy and more U.S. jobs – then raising taxes on these companies is the wrong way to go. Higher taxes on an industry that already pays more than $86 million a day to the federal treasury and which contributed $476 billion to the economy in 2010 would likely cost jobs, not create them, while undermining efforts to reduce imports.