HAYRIDE: American Energy Depends on Pro-Business Tax Policy

House Republican leadership is trying to move at warp-speed to finalize a budget resolution this month. But the standoff brewing between the fiscal hawks and GOP leaders is just one piece of the puzzle.

The other side of this important budgetary process is happening right now behind closed doors where Ways and Means Chairman Jason Smith is leading the conversation on how exactly to pay for President Trump’s mandate to extend his 2017 tax cuts.

Budget reconciliation will be where rubber meets the road for some of the President’s most important campaign promises, specifying large tax and spending policy changes in order to preserve the expiring provisions of the Tax Cuts and Jobs Act. A spokesman for Rep. Smith told the  that “everything is on the table.” While that sounds good in theory, keeping pro-growth elements of the tax code intact should be the priority.

For example, recent news indicates that Republicans are weighing whether to limit or eliminate state and local tax deductions for corporations, also known as C-SALT. While this kind of move would certainly raise a good amount of federal revenue, because it would repeal a pro-growth element of the tax code, it would hamper growth and undermine whatever revenue it would otherwise bring in. There needs to be careful consideration on if these offsets are the right move for the American economy. And in the case of C-SALT, it could even undermine the President’s Day One priority to “unleash American energy.”

Capping or restricting a company’s ability to deduct state and local taxes from federal taxable income would be a direct blow to all successful American businesses. Companies, both small and large across industries pay several types of state and local taxes, including income, sales, property, and excise taxes. But to accurately assess net income and appropriately tax businesses, it is essential to fully deduct those taxes.

C-SALT deductions help drive down business tax burdens, which ultimately lead to investments in workers and operations. It’s a pro-growth tax policy. If Congress wants to reform C-SALT, it should only be in the context of reducing the overall corporate tax rate. Otherwise, limiting these deductions is nothing more than a backdoor tax increase on millions of American businesses.

Capital-intensive industries, such as oil and gas production, would be particularly impacted by this policy shift. For example, unique to extractive industries, most states charge oil and gas companies state severance taxes. For states like Texas this is a huge revenue source. Texas collected the most severance tax revenue in 2021 ($5 billion), followed by New Mexico ($1.8 billion), North Dakota ($1.7 billion), and Oklahoma ($754 million).

But if energy companies cannot deduct the taxes they pay to state and local governments their federal tax burden increases dramatically. This in turn could result in several unintended consequences, such as increased costs of oil and gas, reduced long-term planning and investments, lower job creation, and stifled production.

This is the opposite of what the President had in mind when is signed his executive order to “unleash American energy.” In addition to finding ways to reduce regulatory barriers that have limited domestic energy production, we need our tax climate to be competitive. To support President Trump’s expansive energy agenda, uplift our national and local economies and help fight inflation, we must make America an attractive place for energy companies to do businesses.

Nationwide, eliminating the CSALT deduction would also affect our GDP and individual incomes, with the Tax Foundation finding that CSALT repeal would reduce long-run GDP and American incomes by 0.1 percent and reduce hours worked by 24,000 full-time equivalent jobs. Further disallowing corporate property tax deductibility would reduce GDP and American incomes by 0.6 percent and hours worked by 147,000 full-time equivalent jobs, according to their analysis.

With a potential CSALT elimination, American energy and a significant part of oil-producing state economies would be disproportionately impacted. With President Trump’s energy agenda clearly outlining the need to expand energy production and protect our economic and national security, our leaders should leave C-SALT reform on the cutting room floor. Unless we aim to further expand on Biden era policies that stifled affordable and reliable energy development and led to increased regulatory burdens, it is crucial for policymakers to focus on creating a balanced approach that encourages innovation and investment in the energy sector.

Joe Barton represented North Texas in Congress from 1985-2019 and served as Chairman of the House Energy and Commerce committee.