August 2, 2010
Repealing Manufacturing Deduction for Oil Companies Won’t Level Playing Field
Washington, DC, July 30, 2010 - Instead of unfairly punishing one industry by repealing a manufacturing deduction just for oil companies, the Obama administration should instead lower the U.S. federal corporate tax rate, which would benefit all American companies, according to a new Tax Foundation report.
The administration has proposed repealing the Domestic Manufacturing Activities Deduction—known to tax professionals by its tax code number, the "Section 199 deduction," which allows companies to deduct up to 9 percent of their net income from domestic manufacturing activities. The deduction has the effect of reducing the tax on these activities from 35 percent (the current federal corporate income tax rate) to 32 percent.
"While the tax deduction is by no means perfect—and unfairly excludes other industries such as services, finance and information technology—it's available to a broad swath of manufacturing activities and taxpayers," said Tax Foundation President Scott Hodge, who authored the report. "The principles of sound tax policy dictate that tax laws shouldn't be used to give preferential treatment to one economic activity over another, but tax law shouldn't be used to punish one type of economic activity over another either. Using the tax code in this fashion is arbitrary and has lead to the byzantine tax system we have today."
Tax Foundation Fiscal Fact, No. 237, " Oil Today, Fatty Foods and Sugary Drinks Tomorrow: The Administration's Assault on the Manufacturing Deduction for Oil Companies," is available online at http://www.taxfoundation.org/publications/show/26579.html.
Currently, some activities identified by the Treasury Department as "qualified" production activities include manufacturing clothing, goods, food, software, music recordings or film; producing electricity, natural gas or water; constructing real property such as residential and commercial buildings and infrastructure such as roads and power lines; and engineering and architectural services relating to property construction.
"So why has the administration determined that companies that produce t-shirts, hamburgers, toys, software, or rap music are qualified to receive the credit but oil companies are not?" Hodge said. "Or that companies that design and build roads or those that manufacture automobiles are qualified for the tax break but the companies that produce the gasoline that powers cars down those roads are not? It appears that it all comes down to environmental politics, not sound tax policy or even sound economics."
Treasury argues that the lower tax rate for oil companies distorts markets by encouraging more investments in oil and gas and encourages overproduction. By that reasoning, Hodge notes, the Section 199 deduction should be repealed for every industry because the lower tax rate distorts markets by encouraging more investment in all manufacturing production activities and, since most production activities use energy to produce goods, it leads to the overuse of fossil fuels and nonrenewable energy.
"The reason U.S. companies were disadvantaged before the creation of the manufacturing deduction is the same reason they are struggling today: The U.S. corporate tax rate of 35 percent is out of step with the rest of the global economy," Hodge said. "Rather than create a new tax credit, lawmakers should have responded by slashing the U.S. corporate tax rate down to a competitive level. But, since they chose to cut taxes for every type of manufacturing imaginable, it would be wrong and punitive to start carving up Section 199 just to score political points against the oil and gas companies."
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
###
To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.