Regulatory Uncertainty Keeping Capital Investment on Sidelines

In today’s Washington Post, Robert Samuelson discusses sluggish capital spending and the recovering economy: In the struggle between capital and labor, capital is winning — and that’s hurting the feeble economic recovery. To simplify slightly: Labor (wage-earners and consumers) can’t spend, and capital (businesses and shareholders) won’t spend. Without a powerful growth engine, the economy advances haltingly. Samuelson highlights a number of reasons for sidelined capital spending: globalization, new technologies, weaker unions, financial market pressures and more.  Read Samuelson’s entire column here. But, there are some critical explanations overlooked by Samuelson on why U.S. investment is still sluggish four years after the recession. Uncertainty about key policy issues has made business cautious about investing and raises the hurdle rate that new investment must achieve. Real non-residential fixed investment is still almost $30 billion below the fourth quarter of 2007 when the recession began. The primary drivers of corporate uncertainty today include Dodd/Frank implementation, the Affordable Care Act, reform of the federal tax code, as well as fiscal and monetary policy. Top at the list of uncertainty for many corporations is environmental and energy policy regulations from agencies such as EPA and DOE. See for example ACCF testimony on the impact of regulating…

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Tax Reform Must Encourage, Not Hinder, Capital Formation

As Congress continues to examine comprehensive tax reform, the nation’s investor-owned electric companies are working to educate lawmakers and the Administration about the impact that certain changes to the tax code—particularly changes affecting dividend tax rates and the deductibility of interest expense—could have on our industry’s ability to raise capital. Today, the electric power industry is investing for the future. Our sector has both the highest capital-intensity and absolute capital spending levels of all U.S. industrial sectors, with the industry’s capital expenditures reaching a record $90.5 billion last year alone. Looking ahead, we plan an average annual investment of approximately $85 billion through 2015. These investment dollars are creating a cleaner generation fleet and are enabling the industry to meet a wide variety of new environmental requirements. They are developing a smarter, more flexible, and more resilient grid to meet the growing demands of our digital society. They are also promoting increased electrification, particularly in the transportation sector to improve air quality and reduce our nation’s foreign oil imports. Importantly, these capital investment programs offer a critical source of much-needed, high-quality job creation in many states. Dividend Tax Rates Earlier this year Congress passed the “American Taxpayer Relief Act.” One…

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LNG Export Permit Delays: What’s At Stake?

Last week the U.S. Department of energy approved a third application to export LNG after two years of regulatory limbo.  With the approval of Lake Charles LLC’s LNG exports to non-FTA countries, the U.S. will now have the ability to export up to 5.6 billion cubic feet per day of natural gas.  Opponents to natural gas exports claim this export capacity represents a  “sweet spot”  for natural gas exports – although a government study concluded no such sweet spot exists.  To the contrary, every major study has found that the more LNG is exported, the better for America. In fact, expanding natural gas exports will be an economic “win” for the United States.  “Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing [liquefied natural gas] exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased,” concluded a 2012 major study commissioned by the Energy Department (DOE). The U.S. produced an average of 65.9 billion cubic feet of natural gas per day in 2012, and the global market for natural gas expected to grow over the next decade.    With 19 applications still under consideration, the slow permitting process…

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How Federal Energy Policies Can Support U.S Economic Recovery

Today the Senate Energy and Natural Resources Committee, chaired by Senator Ron Wyden (D-Oregon), holds yet another hearing to investigate the pricing of oil and gas commodities in the U.S. and the restructuring of the U.S. refining industry and distribution system. While the hearing will be a platform for some Members of Congress to point fingers, it’s important to review federal policies that should be adopted to put downward pressure on prices, those which could increase prices and should be abandoned, and the contributions of the energy industry to the U.S. economy. Expanded Access to Onshore and Offshore Reserves Will Positively Impact U.S. Growth Several recent economic analyses suggest that increased access to domestic onshore and offshore oil and gas reserves (including shale gas) could strongly boost U.S. economic recovery, manufacturing and job growth. Fossil fuels, which provide 78% of U.S. primary energy production, can have a positive impact in restoring strong economic growth. A recent Global Insight/CERA analysis, “Restarting the Engine-Securing American Jobs, Investment and Energy Security” finds that allowing exploration and development in the Gulf of Mexico in 2012 could create more 230,000 jobs, a $44 billion increase in GDP and $12 billion in additional tax receipts to…

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Difference in Effective Corporate Tax Rates and Tax Reform: What Does it Mean for Different Industries?

At a recent event sponsored by the American Council for Capital Formation, I had the opportunity to brief those present about the effective corporate tax rate for my employer, Con-way Inc., a Fortune 500 Trucking and Logistics Company. Our effective rate approaches 40% (which includes federal, state and foreign income taxes) and is similar to that of our competitors. As I listened to other industry representatives speak about effective corporate tax rates in their various industries, it dawned on me that the difference in effective corporate tax rates can result in capital flows into industry sectors much like the difference national corporate tax rates have on capital flows between nations. Up to this point, much of the discussion of corporate taxes has focused on the difference between worldwide tax rates and how capital flows tend to gravitate towards countries where returns on investment are enhanced by lower corporate taxes. If the global competition for capital is real, then it stands to reason that competition among industry sectors for capital is real as well. Much of the difference between industries is in some ways inadvertent – the cumulative result of years of tax policy changes. This greatly increases the complexity of…

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Manufacturing Renaissance

Who would have dreamed a decade ago that oil and natural gas would become the impetus for American energy security and a revitalized manufacturing sector? Who would have imagined that OPEC members would be meeting to discuss the U.S. shale revolution and its impact on their economies Yet, without question, the worldwide energy picture has changed dramatically in recent years. The United States, once resolved to dependency on – and some would say subservient to – foreign governments to meet our energy needs, is on a path to becoming an energy super power. Continued investments in new technologies and processes like hydraulic fracturing, advanced imaging and horizontal drilling are unlocking new energy sources, creating jobs and the prospect of revitalizing the American economy in the process. Supplies of oil, natural gas and natural gas liquids (NGL) from shale development are leading to record-breaking volumes of fuel and raw material that carry enormous opportunities for the nation. In just 2009 alone and amidst a crippling recession, the oil and natural gas industries added an estimated $1.1 trillion to the U.S. economy, the equivalent of eight percent of GDP. And for every job created through oil and natural gas production, three additional…

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