Today is tax day! And just in time for the Spring Congressional recess, House Ways and Means Chairman Dave Camp (R-MI) has submitted a comprehensive tax reform proposal with a little something for everyone to criticize.
But let us focus on the positive. Chairman Camp proposes to repeal one of the most important tax breaks for the oil, gas, and mining industries: the percentage depletion allowance (PDA). When a company calculates its gross income for federal taxes, the PDA permits industry to deduct a set percentage on the theory that the actual value of its assets (the minerals in the ground) declines as the company depletes that resource. The more you dig out of the ground, the less the deposit is worth.
When it comes to mining on public lands, the PDA is just one of a series of subsidy sweeteners the industry enjoys. First, the 1872 Mining Law through a process called patenting, gives the people’s land- and all our gold and silver underneath- to the mining industry for about $5/acre. And when the mining companies extract our gold, they pay no royalty to the taxpayer. Then, they get a tax break on top of getting free minerals and virtually free land. Not a bad deal if you can get it. The mining industry’s PDA costs taxpayers about $100 million a year.
Leveling the Playing Field
Tax policy should encourage the kind of economic activity we need and discourage the kind we do not. For example, tax writers may decide that we should put high taxes on cigarettes to discourage underage smoking. Or we may want to create tax incentives for the film industry because we like Hollywood stars. Either way, every tax, tax break, or subsidy legislators dole out means we are expressing a policy preference for one thing or another.
Tax breaks should aid fledgling renewable energy companies compete against the multinational fossil fuel and mining giants. This is because successful solar and wind power companies achieve important climate policy objectives like reducing our carbon footprint. Mining companies already get the double subsidy of free minerals plus the PDA. The oil and gas drillers benefit from the PDA and externalizing their costs to the rest of us. So, this is not just about picking winners and losers. This is about leveling the playing field.
Everyone’s a Critic
Chairman Camp has chosen to retire from Congress at the end of this term. As a signature accomplishment, he seeks the Holy Grail of tax bills: comprehensive reform of our complicated tax code. However, like many holistic attempts at solving tough problems, there’s something in there for everyone to dislike. Creating strange bedfellows among opponents will not help the bill’s chances, but it’s stranger still to see any member of Congress willing to take on the oil, gas, and mining industries.