President Barack Obama’s new corporate taxation plan proposes a permanent, refundable production tax credit for renewable energy, while cutting subsidies to oil and gas companies in another signal that he is making energy a campaign issue even as rising gasoline prices open the door to Republican attacks.
With US gas prices climbing toward $4 a gallon ($1.05 a litre) on concern over Iran, declining US refining capacity and the approach of the high-demand summer driving season, the Obama administration called for repeal of preferential tax treatment for oil and gas companies, among dozens of other subsidies and loopholes in the corporate tax code, while reducing the top corporate tax rate from 35% to 28%. Manufacturers would see tax rates dip to 25%.
“The effective tax rate on an investment in buildings or other structures by a manufacturing company might be twice as high as the rate that applies to an oil or gas company,” says Treasury Secretary Timothy Geithner. “These subsidies distort choices about where companies should invest, and they distort the allocation of capital.”
Even as it cuts help for the oil and gas sector, the administration’s plan “would make permanent the tax credit for the production of renewable electricity, in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar”.
The temporary nature of support for renewable energy in the tax code “has created an uncertain investment climate, undermined the effectiveness of our tax expenditures, and hindered the development of a clean energy sector in the United States”, the administration says in its Framework for Business Tax Reform [25-page PDF]. “In addition, the structure of renewable production and investment tax credits has required many firms to invest in inefficient tax planning through tax equity structures so that they can benefit even when they do not have tax liability in a given year because of a lack of taxable income. The President’s Framework would address this issue by making the permanent production tax credit refundable.”
The wind industry in particular is laying off manufacturing workers ahead of the expiration at the end of this year of the production tax credit (PTC). Despite support from both political parties, an extension of the PTC was not included in last week’s payroll tax cut extension legislation passed by Congress. The industry is now searching for other avenues to advance its top priority.
While Republican presidential frontrunner Mitt Romney wants to see an even greater cut to corporate taxes, partisan rancor in this election year makes it unlikely that such a sweeping revision of tax codes as Obama proposes could be achieved.
Already, Republican presidential contenders are seizing on the rising gas prices to attack the Obama administration and call for a range of measures they say would result in lower prices at the pump – which are closely followed by consumers.
Newt Gingrich dug up comments made by Obama’s Energy Secretary, Steven Chu, before Obama was elected, suggesting US petrol prices should eventually approach European levels. Gingrich, trailing frontrunners Mitt Romney and Rick Santorum in recent polls, also outlined his plan to free the US of Middle East oil and reduce gas prices to $2.50 a gallon in a 30-minute paid advertisement airing in the run-up to Super Tuesday, 6 March, when 10 states hold primaries.
While Washington has very few levers to pull to impact prices in the short-term, that won’t stop the issue from contributing to what already promises to be a hot political summer.
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