[Senate Hearing 112-776]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 112-776

                TAX REFORM: IMPACT ON U.S. ENERGY POLICY

=======================================================================

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 12, 2012

                               __________








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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)

















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     3

                               WITNESSES

Nickles, Hon. Don, chairman and CEO, The Nickles Group, LLC, 
  Washington, DC.................................................     4
Sharp, Hon. Philip, president, Resources for the Future, 
  Washington, DC.................................................     6
Jorgenson, Dr. Dale, Samuel W. Morris university professor, 
  Harvard University, Cambridge, MA..............................     9
Hamm, Harold, chief executive officer, Continental Resources, 
  Inc., Oklahoma City, OK........................................    10

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    39
Hamm, Harold:
    Testimony....................................................    10
    Prepared statement...........................................    41
    Responses to questions from committee members................    45
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement...........................................    49
Jorgenson, Dr. Dale:
    Testimony....................................................     9
    Prepared statement...........................................    50
    Responses to questions from committee members................    62
Nickles, Hon. Don:
    Testimony....................................................     4
    Prepared statement...........................................    68
    Responses to questions from committee members................    72
Sharp, Hon. Philip:
    Testimony....................................................     6
    Prepared statement...........................................    73
    Responses to questions from committee members................    80

                             Communications

ABM Energy.......................................................    85
American Council for an Energy-Efficient Economy.................    87
The American Institute of Architects.............................    91
American Public Power Association................................    97
The Business Council for Sustainable Energy......................   100
Center for Fiscal Equity.........................................   102
Efficiency First.................................................   107
IHS CERA Inc.....................................................   109
Independent Petroleum Association of America.....................   141
Large Public Power Council (LPPC)................................   146
National Association of Royalty Owners (NARO)....................   154
National Biodiesel Board.........................................   162
National Rural Electric Cooperative Association..................   167
Olson, Pamela F., et al..........................................   173
Residential Energy Efficient Tax Credit Industry Coalition.......   220
Solar Energy Industries Association (SEIA).......................   231

 
                         TAX REFORM: IMPACT ON 
                           U.S. ENERGY POLICY

                              ----------                              


                         TUESDAY, JUNE 12, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:06 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Conrad, Bingaman, Kerry, Wyden, Cantwell, 
Nelson, Menendez, Carper, Hatch, Grassley, Snowe, Crapo, 
Coburn, Thune, and Burr.
    Also present: Democratic Staff: Russ Sullivan, Staff 
Director; Ryan Abraham, Tax Counsel; Lily Batchelder, Chief Tax 
Counsel; and Harun Dogo, Fellow. Republican Staff: Chris 
Campbell, Staff Director; Curt Beaulieu, Tax Counsel; and Mark 
Prater, Deputy Chief of Staff and Chief Tax Counsel.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The hearing will come to order.
    The writer Hunter Thompson once wrote, ``Anything worth 
doing is worth doing right.'' I could not agree more. Our 
country is at a pivotal moment in energy policy. It is 
important that we do it right. There have never been so many 
worthy energy options. They are worth doing, and they are worth 
doing right.
    Thankfully, we are already making progress diversifying our 
energy portfolio. We have an opportunity through tax reform to 
drive that progress further.
    When I first ran for Congress, America was reeling from an 
oil embargo. Gas prices had doubled. At one point in early 
1974, 20 percent of American gas stations had no fuel at all. 
It was clear that we could never again allow America to be so 
dependent on a single source of energy.
    Since then, we have boosted a more diverse, efficient, and 
productive energy policy. Advances in technology mean more 
domestic oil and natural gas are available than ever before. We 
also have more renewable and clean energy sources. But we can 
do more.
    We are still, I think, too reliant on fossil-based energy 
sources. Ninety-four percent of the energy used in the 
transportation sector comes from oil. Only 10 percent of our 
electricity consumption is generated from renewable or clean 
energy resources.
    Our country needs a diverse energy sector like we have in 
my home State of Montana. So I will just brag a little bit. We 
are an energy State. We are one of a dozen States that produces 
more energy than it consumes.
    In eastern Montana, at the edge of the Bakken formation, 
next to North Dakota--my colleague to my right knows this all 
too well, because the Bakken is even a greater formation in 
North Dakota than it is in Montana--our oil and gas fields are 
going through a renaissance. Technology has unleashed the oil 
and gas potential and created thousands of jobs.
    In central Montana, the wind turbine blades harness the 
power of the Chinook winds. Wind farms in Montana now power 
100,000 homes. Three new wind farms are being built. And in 
western Montana, biomass powers sawmills and adds electricity 
to the grid.
    Montana also produces 45 million tons of low-sulfur coal 
each year, and we are leading the way on carbon capture and 
sequestration.
    National energy policy, I think, should replicate a lot of 
this mix. If we do not develop U.S. energy policy, we will 
continue to be subject to the whims of foreign dictators and 
sudden spikes in the price of oil. We will be one hurricane or 
one regime change away from $6 gasoline. That would be 
disastrous for our economy.
    A $1 increase in the price of gasoline costs Americans $110 
billion a year. We are all too aware of that in our State.
    The tax code is an important driver of energy policy. Tax 
incentives provide 85 percent of the energy sector's Federal 
support. These provisions cover almost every conceivable form 
of energy--nuclear, oil, gas, coal, wind, solar, and 
geothermal. Tax provisions also cover a wide variety of energy 
use, from powering common home appliances to running massive 
factories.
    But these incentives can be improved. Currently, the type 
and level of tax incentives vary for different technologies. 
Some incentives are temporary, others permanent. In some cases, 
there are multiple incentives for the same technology. The 
result is inefficiency.
    Provisions that do not create jobs or improve our energy 
policy should expire or be repealed. Right now we are providing 
direct incentives to select technologies and industries. 
Perhaps we should adopt a more technology-neutral approach and 
stop playing favorites. That way, we could still help new 
energy technology develop, but let the market decide which ones 
stick.
    Tax reform is an opportunity for the energy sector to make 
real progress. It can move us further from foreign oil. It can 
lead us down the road to diverse, clean, and secure energy 
resources.
    So let us seize the opportunity as we develop domestic 
energy. Let us also focus on efficiency and try to make the 
code less complex. Let us use tax reform to ensure our country 
has a more secure and diverse energy supply. And, as Mr. 
Thompson wrote, let us find the things worth doing, and let us 
do them right.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. Senator Hatch?

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Thank you, Mr. Chairman. I want to thank the 
chairman for once again holding a critical hearing on tax 
reform. We have had a large number of these hearings, and they 
have been very helpful, especially as we go into this next year 
and the remaining part of this year.
    It is essential that we continue these discussions in 
pursuit of reforming a tax code which is complicated, unfair, 
and difficult to administer. We cannot afford as a Nation a tax 
code that prevents our full potential for economic growth.
    Looking at the witnesses, it is clear that we have a good 
representation of different viewpoints about the various energy 
sources addressed throughout the tax code itself. My hope is 
that this hearing will contribute to our goal of comprehensive 
tax reform in the near future.
    It is important to conduct our examination today with 
President Reagan's three criteria for tax reform as our 
guideposts. We will be looking at the fairness of the system; 
we will be looking at the efficiency of the system, with a 
particular emphasis on its anti-growth features; and we will be 
looking at the complexity of the tax code. If we keep these 
principles in mind, I am optimistic that this committee will be 
in a position to reform our tax code in a way that is better 
for families, businesses, and our economy.
    I know many of my colleagues on both sides of the aisle 
hope to achieve a tax reform that lowers rates while broadening 
the tax base. However, from my perspective, there is another 
feature that will be essential for any successful tax reform.
    Tax reform should be about tax reform, not about deficit 
reduction. We should be simplifying our tax code and lowering 
rates to create a more fair system that generates the economic 
growth necessary to generate jobs and revenue itself. It would 
be a mistake to call tax increases tax reform and use that 
increased revenue to achieve deficit reduction rather than pro-
growth rate reductions.
    Today we are prospectively focusing on what role, if any, 
energy policy should play in the tax code. Energy policy has 
been creeping into the tax code at an exponential rate. 
Yesterday, I heard the chairman compare the tax code to hydra, 
the 100-headed creature of Greek mythology. Each time you cut 
off one heard, two more grow back. I believe this analogy is 
particularly apt with respect to energy tax provisions.
    I hope today that we can have an open debate about whether, 
going forward, there is a role for energy policy in the tax 
code and, if so, what that role should be. I could keep 
talking, but there is no tax incentive for producing a lot of 
hot air yet. So I will just let the witnesses get to it. 
[Laughter.]
    I want to thank you, again, Mr. Chairman. And I look 
forward to hearing from our panel here today.
    The Chairman. Thank you, Senator.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. It is now my honor to introduce our panel. I 
am especially honored to introduce our first witness. Don 
Nickles, currently chairman and CEO of the Nickles Group, for 
24 years represented the great State of Oklahoma and was a 
valuable member of this committee. And I just welcome you back, 
Don. It is great seeing you. I particularly remember your 
incisive and persistent and perceptive points of view. I deeply 
appreciate your return.
    Next is the Honorable Phil Sharp. Phil is currently the 
president of Resources for the Future, and for 20 years 
represented Indiana's 2nd district in the U.S. House of 
Representatives. As a matter of fact, Phil and I were freshmen 
in the House, the Watergate class, 1974. I have very fond 
memories of that, and especially of you, Phil. You were one of 
the sharpest--no pun intended--members of the group.
    Our third witness is Dale Jorgenson. Dr. Jorgenson is the 
Samuel W. Morris university professor, Department of Economics, 
at Harvard. As it turns out, Dr. Jorgenson and I are fellow 
alumni of the same high school in Helena, MT.
    I might add, a former chairman of this committee, Bill 
Roth, is an alumnus from that same high school. There are three 
of us--Helena High. It is a good school. Two years in a row, we 
did not make the State championship in football, but we were 
runners-up 2 years in a row.
    Dr. Jorgenson. They had a great basketball team, though.
    The Chairman. Great basketball; back in your era, they won. 
They won the championships, that is true. Thank you.
    Finally, we have Mr. Harold Hamm. Mr. Hamm is chairman and 
CEO of Continental Resources, a position he has served in since 
its inception in 1967.
    Thank you all for coming very much. You all know our 
practice, at least we assume you do. Certainly, you do, Don. So 
speak for about 5 or 6 minutes, everyone, and all your 
statements will be inserted in the record.
    Go ahead, Don. We are glad to have you here. I tell all our 
witnesses, pull no punches, tell it like it is. Life is short, 
you cannot take it with you. Go for it.

 STATEMENT OF HON. DON NICKLES, CHAIRMAN AND CEO, THE NICKLES 
                   GROUP, LLC, WASHINGTON, DC

    Mr. Nickles. Mr. Chairman, thank you. And it is a pleasure 
for me to be on the panel and join my colleagues on the panel, 
especially Harold Hamm, who has built just one heck of a 
company in Oklahoma, Continental Resources, and is doing so 
much in North Dakota and Montana, but also in Oklahoma. And 
they have added hundreds and hundreds of jobs and a lot of 
valuable resources to this country. So it is a pleasure to join 
him as well.
    Mr. Chairman, you mentioned talking about tax reform and 
doing it right. I remember being in this body and particularly 
this committee. And in my 24 years in the Senate, I loved this 
committee, this committee and those who got on it. And it takes 
a long time to get on the committee. But it is a great 
committee, and you are doing really great work, and especially 
if the Senate works.
    And so I am a big advocate for regular order and marking 
up, and that is the tradition of this committee, marking up 
bills and having lots of amendments and lots of debate. And we 
did that on countless bills.
    I remember that some of the best time in my service in the 
Senate was when we had tax bills and we considered hundreds and 
hundreds of amendments in the committee and/or on the floor.
    And so I urge you, in the process portion of this, whether 
you are talking about extenders or whether you are talking 
about trying to avoid the calamity of the end of this year, 
beginning of next year, or restructuring the tax code, regular 
order is the process. And that way, the Senate works, and it 
makes the Senate such a special place to be.
    You also mentioned doing it right, and you talked about 
energy taxation. I ran for Senate because of windfall profits 
tax. Absolutely, if Congress had not passed that in 1979, I 
would not have been here. But it motivated me.
    I was a State Senator at the time, but I disagreed with 
that so strongly. So when I say, do it right, I think we are 
talking about good tax policy, and good tax policy is good 
economics, it makes sense.
    You do not have to pick winners and losers. Windfall 
profits tax discouraged domestic production and encouraged 
imports. How absurd. We finally got rid of it. But it was a 
terrible idea.
    There are some other bad ideas that are out there. The 
administration talked about, well, let us do away with 
intangible drilling costs. They had a comment in their 
statement. They said, ``The expensing of IDCs, like other oil 
and gas preferences the administration proposes to repeal, 
distorts markets by encouraging more investment in the oil and 
gas industry than would occur under a neutral system. To the 
extent expensing encourages overproduction of oil and gas, it 
is detrimental to long-term energy security and is also 
inconsistent with the administration's policy of reducing 
carbon emissions.'' What a crazy statement.
    Good tax policy allows expensing--it is not only of wages. 
Mostly, intangible drilling costs are wages. The tax code--you 
should allow any industry to expense their wages that are 
incurred in the year that they are paid. Not necessarily a 
credit. This is not a credit. This is not a credit against 
taxes. It is expensing. So it is expensing of non-recoverable 
business expenses. You ought to be able to expense that. So I 
defend that.
    They also call 199 a subsidy to big oil. Hogwash. Now, I 
was on the committee when we created section 199, a lower 
corporate rate for manufacturers. And some of you may remember, 
I was a manufacturer before coming to the Senate.
    But I argued against it, and I still think it is bad 
policy. I think you ought to have it uniform. So, when you are 
reforming the tax code, have it be a uniform corporate tax 
rate, not a lower rate for manufacturers versus service 
companies or other companies. It is very confusing, very 
difficult.
    And then in past law we said, well, all manufacturers get 
it except for oil. Oh, we are not going to give them the full 
benefit of section 199, which is basically a 3-point reduction 
in the corporate rate. Big oil only gets a couple of points of 
it.
    But it is bad policy. So I urge you to have a uniform 
corporate rate. And I might mention too, there are some 
companies that have both. They are manufacturers, they are 
financial companies, they are one and the same. They have both. 
And so, then they have all this accounting challenge trying to 
figure out what is what.
    Anyway, where you are trying to come up with a more 
uniform, lower, more competitive rate--and I think everybody, 
Democrats and Republicans, is talking about that, God bless 
you, keep it up--a lower rate, a more competitive rate, a 
competitive international rate, which probably means going to a 
territorial system, makes good common sense. And to eliminate 
exemptions and credits along the way, I think, makes sense.
    Tax all income once. We have a lot of income that is not 
taxed. So you can help lower the rate by doing so.
    There is also a proposal for eliminating dual capacity. And 
I would just say, if you want to have U.S.-headquartered oil 
companies, if you eliminate that, you are going to double-tax 
their foreign earnings and, as a result of that, the net result 
is Total, British Petroleum, other foreign companies are going 
to want all their international deals, and that would just 
really be a dumb thing for us to do, very short-sighted.
    And I could go on, Mr. Chairman. I just think making good 
tax policy is not good energy policy, it is good tax policy. 
Good tax policy would apply to all industries, and I would 
encourage the committee to advance its work.
    I encourage the committee to do that, and I encourage you, 
for as much as can be done this year, to avoid the end-year 
challenges. And for totally reforming the system, I encourage 
you along that way. I think is very exciting, and, hopefully, 
you will be successful.
    For it to be successful, this committee has to lead, and I 
hope and pray that you do.
    The Chairman. Thank you, Don. We would like to have you 
back.
    [The prepared statement of Mr. Nickles appears in the 
appendix.]
    Mr. Nickles. Thank you. Good to be back.
    The Chairman. You would be a great addition to this 
committee.
    Congressman Sharp?

          STATEMENT OF HON. PHILIP SHARP, PRESIDENT, 
            RESOURCES FOR THE FUTURE, WASHINGTON, DC

    Mr. Sharp. Thank you very much, Mr. Chairman. I am 
delighted to be here. And I must quickly say that, as the head 
of Resources for the Future, it is an independent think tank, a 
nonpartisan, non-lobbying organization, and the people in it 
are a lot smarter than I am. And so these are strictly my 
comments from my experience on a variety of commissions, as 
well as here in the House of Representatives.
    Let me quickly say my plan is just to provide a few 
contextual things about where we are in public policy on 
energy, as well as where the markets are. This committee--many 
of you are way ahead on these issues, and this is probably not 
particularly relevant, but I think it is very important in the 
public discussion that we try to get a better perspective on 
what really goes on with energy policy and with our markets.
    Now let me say, obviously, as everyone here knows, energy 
is absolutely essential to our modern economy and to any 
economic growth that we want to have. It also has implications 
for our national security, and it also has consequences for 
health, safety, and the environment.
    And our practical problem is, there is no policy, there is 
no set of policies, that will serve all of these goals. So we 
are always in conflict over it, and it comes right here into 
this committee and everywhere else. And, frankly, the American 
people and others should reduce some of their expectations 
about what can be accomplished and how it can all fit together 
logically. This is a vast country, this is a vast problem, and 
we are going to come at it over time in many different ways.
    Let me quickly indicate, however, that while there are many 
things that we have done and tried--and some failed and some 
worked--it is very important to remember that one of the 
fundamentals about our energy policy, which is true through 
Democratic and Republican administrations and Congresses, is 
that we rely overwhelmingly on private capital to build, 
produce, and distribute our energy in this country, and nobody 
that I am aware of wants to stop doing that.
    And what that means is, it is a major challenge to what the 
government can actually efficiently do, because you are always 
trying to change, incentivize, or restrict behavior by 
investors or by consumers. And many of the initiatives that are 
taken do not pay off because they involve millions of decisions 
by consumers and thousands of decisions by investors under 
pressures and with other values at stake.
    With this limitation in mind, nonetheless, there are many 
things that do work and do help. But let me quickly give you a 
piece of the picture that the chairman already outlined, which 
is: our picture on energy continually changes, and we have a 
new picture today compared to where we were 10 years ago. And 
it is very important that we recognize this change, partly to 
recognize that it is going to continue to change and that 
policy has to accept and work through those changes.
    First, we have a vast array of new technologies that have 
come into the marketplace in this decade. I do not care whether 
it is in oil production, gas production, solar, nuclear, or 
efficiencies in technologies and vehicles, it is amazing. And 
most of it was not predicted to happen by academics, by 
industry, or by government when the turn of the century came 
about. Many of these things were quite well-known, but nobody 
expected them to take hold the way they did.
    Second of all, we have a radical change in our supply of 
natural gas, and the projected supply of natural gas, again, 
was unanticipated at the beginning of the decade.
    Third, we have a decline, again unpredicted, in oil 
imports, which is viewed as very positive from a security 
standpoint, with a projection that it will continue, if we do 
not mess it up.
    Fourth, we have, actually, a decline in our carbon dioxide 
emissions in this system, with a projected minimum growth over 
the next decade. This is a positive development. Some of it, of 
course, is just the consequences of the unfortunate slowdown in 
the economy, but it also represents, actually, improvements in 
efficiencies and fuel-switching and other things that have gone 
on. There is more to be done, in the view of many people, on 
this front, but this is progress.
    Now, why did this happen? Let us remember the power of 
price at the outset, because we almost always want to deny it 
in public conversations in this country. First, we had a very 
high rise in natural gas prices at the turn of the century, 
less than a decade ago. It was followed within a few years by a 
very high rise in oil prices, and, by the way, again, neither 
academics, the government, nor the industry predicted this--a 
few individuals probably did, but they ended up writing their 
books and getting rich after the fact. Whether they actually 
knew it ahead of time is not clear.
    The truth is, that had a powerful impact on the behavior of 
consumers, investors, and government policy.
    Second of all, obviously, the entrepreneurial risks that 
people are willing to take, like Mr. Hamm and others, have been 
powerful, whether it is in oil, in the new natural gas supply, 
in the new nuclear plant that is about to be built in this 
country, in solar, in a whole bunch of resources. We require 
that entrepreneurism across the board if we are going to be 
effective. Nobody in this group, I am sure, would deny the 
importance of that.
    The third reason for this change is because many of these 
technologies that came in the marketplace for production or for 
demand reduction were actually the result of decades of 
research, some of it by the private sector, much of it 
supported at some level by the public sector, some in the 
public sector, like our national laboratories. It is very hard 
to unsort that mix of which is which, but nobody should 
misunderstand that both are important, and government policy 
and government expenditure help advance these technologies that 
now we have sucked into the marketplace.
    And the fourth, finally, there of course have been policies 
at the State and Federal levels that have helped incentivize 
innovation, and this committee itself has been very active in 
that, helped both the efficient technologies and promoted 
adoption in the marketplace.
    Many of these policies, I would suggest to you, actually 
followed on the price increases that drove the incentives for 
the marketplace, as well as the political incentive for 
Congress and others to make decisions.
    Now, let me suggest to you that, while this picture is, in 
my view, a very positive development compared to where we were 
10 years ago, obviously, it was marred in the past couple of 
years by that massive blowout in the Gulf of Mexico and marred 
by the events at Fukushima. These are high-risk operations. We 
are in a position around the world where we do things big. We 
are going to be taking big risks, and we have to be smart about 
how to mitigate those, to the extent we can. I am not one who 
thinks we can just walk away from all these risks, but I do 
think we have a serious responsibility, governments and 
industry, to minimize their impact.
    Now, this new natural gas supply is the overwhelming 
development in our energy picture that was certainly 
unanticipated, and many people believe, and I certainly 
believe, this is a powerful economic benefit to this country. 
But we cannot mistake that there are major challenges in this 
development that have to be taken seriously, whether they are 
impacts on air, on methane leakage, on water--and some in the 
industry are being extremely responsible about this and, 
frankly, some are not.
    We have many players in this new and dynamic field, and 
government has to be smart and careful in the way it regulates. 
But we have to take it seriously, as the National Petroleum 
Council study of last summer makes very clear--this is very 
much of an industry, along with other NGOs and others involved 
in this. It is a Federal advisory committee, as you folks well 
know--which said, you have to have responsible development, and 
you have to take these issues seriously for us to be able to 
capitalize and maintain a good thing.
    There are other challenges--excuse me, Mr. Chairman. I will 
stop with one more challenge, and that is, this is not just 
changing the natural gas picture. This is changing the picture 
of all other major energy sources in this country. And, as you 
make policy, you need to think through what is going to be 
undermined and what is not by this enormous development.
    Sorry, Mr. Chairman.
    The Chairman. No problem. Thanks very much, Congressman.
    [The prepared statement of Mr. Sharp appears in the 
appendix.]
    The Chairman. Dr. Jorgenson, you are next.

 STATEMENT OF DR. DALE JORGENSON, SAMUEL W. MORRIS UNIVERSITY 
          PROFESSOR, HARVARD UNIVERSITY, CAMBRIDGE, MA

    Dr. Jorgenson. As the chairman stated, I am a professor at 
Harvard University. I have taught in the Department of 
Economics there since 1969. I have devoted a good part of my 
relatively lengthy career as an economist to the topics that we 
are here to debate today, and it is a very great privilege for 
me to participate in this panel and to join you in your 
deliberations.
    I would like to discuss three issues. To fix ideas, I am 
going to associate a number with each one of them. And the 
first number that I would like you to remember is 1.5 percent 
of the GDP. What is this? A system of environmental taxes on 
fossil fuel combustion would generate revenues equal to 1.5 
percent of the GDP. This would be mainly a very substantial tax 
on coal, a much more limited tax on oil, and a minimal tax on 
natural gas. There would be no taxes on renewable forms of 
energy like wind or solar. The 1.5 percent of the GDP does 
not--I want to emphasize--does not include any additional 
revenues from limiting or eliminating tax expenditures, like 
the ones that you are going to hear about today.
    Let me proceed to the second issue that I would like to 
discuss. That is the Federal Government budget.
    You have been told by dozens of economists inside and 
outside the government that we will be going over a fiscal 
cliff at the end of this calendar year. The Bush tax cuts of 
2001 and 2003 are finally scheduled to sunset as we welcome in 
the new year. There is also the threat of sequestration, which 
was legislated by the Congress in August of last year. And 
beyond that looms another fight over the debt limit.
    Douglas Elmendorf, the highly respected Director of the 
Congressional Budget Office, has told you that all of this will 
produce another recession. So the number I would like you to 
remember here is 2 percent of the GDP. This is the difference 
between the Federal revenue of 17 percent of the GDP in 2011, 
which is the last year for which we have real numbers, and 19 
percent, which is a long-term average of Federal revenue of the 
GDP for the last 30 years. This is the minimum that I think we 
can expect that revenue will contribute to closing the budget 
gap that looms ahead of us.
    The third issue is comprehensive tax reform. Ranking Member 
Hatch has reminded us that that is the subject of these 
hearings. The number there I would like you to remember is 7 
trillion. To paraphrase that great U.S. Senator after whom this 
building is named, a trillion here and a trillion there, and 
pretty soon you are talking about real money.
    So what is the 7 trillion? This is the cumulative impact of 
a carefully designed system for comprehensive tax reform. Seven 
trillion is more than sufficient when added to our national 
wealth of $60 trillion to put our labor force back to work and 
to resolve our fiscal crisis. In short, it would enable us to 
achieve a fiscal policy that is sustainable.
    Let me summarize. We are not here to debate energy policy 
alone. We are not here to debate comprehensive tax reform 
alone. We are not here to debate the Federal Government's 
budget alone. We are here to see how all three can be fitted 
together to solve our budget problem, to clean up our 
environment, and to give a positive thrust to the growth of our 
long-ailing economy.
    Thank you very much.
    The Chairman. Thank you, Doctor. Within time, too.
    [The prepared statement of Dr. Jorgenson appears in the 
appendix.]
    The Chairman. Mr. Hamm?

STATEMENT OF HAROLD HAMM, CHIEF EXECUTIVE OFFICER, CONTINENTAL 
               RESOURCES, INC., OKLAHOMA CITY, OK

    Mr. Hamm. Thank you. Thank you, Chairman Baucus, Ranking 
Member Hatch, and members of the committee. It is an honor and 
a privilege for me to be here today. I will be speaking on my 
own behalf, not as a representative of Continental Resources. I 
am not here on behalf of the Romney campaign, for which I serve 
as an energy advisor.
    It has been 20 years since I was here speaking before this 
committee. Senator David Boren, at that time, was co-chairing 
the committee, I believe, and I spoke to him about a couple 
things that were mostly unknown and totally unconventional at 
the time. One of them was horizontal drilling, and the other 
was the aspect of drilling into the source rocks themselves, 
the shales, that might produce a vast amount of natural gas. We 
were talking about a temporary trigger, a tax trigger, to 
advance that theory.
    Well, that was not given. We did not get a tax trigger. But 
over the last 20 years, we have seen those technologies 
developed, and, thank God, we have come a long way since then.
    Continental is a top 10 petroleum liquids producer. We are 
75 percent oil with last year's production. We focus on oil.
    The Bakken Play, Senator, started in Montana, and that is 
where we started with Elm Coulee Field, and, of course, the 
deep end of the pool is over in Senator Conrad's State, over in 
North Dakota, and we were one of the original players over 
there.
    I might say that only here in America can a 13th child of a 
sharecropper turn a 1-man 1-truck operation into one of the 
Nation's largest oil companies. But having discovered that 
field at Continental, we have been able to do that.
    Today, I am going to talk to you from the perspective of 
the seasoned petroleum geologist, explorationist, who has been 
in this business buying oil, from my own account, for about 45 
years.
    I first started speaking on oil about 2 years ago. At that 
time, it was being severely disparaged, and people were trying 
to get market share. So I thought someone needed to stand up 
for oil, and I started talking about that. It is a very 
important segment of our energy picture. Nearly all 
transportation runs on it. There is hardly a jet plane anywhere 
that burns anything besides oil products.
    I am also here to talk about these Federal tax provisions 
that will allow us to continue the job of the viable American 
dream of energy independence that we have begun. These are very 
important for America.
    There are 18,000 independent producers today that drill 95 
percent of the wells in America. We produce 67 percent of the 
oil, 86 percent of the natural gas that is produced today. We 
typically invest all that we make, borrow about 30 percent 
more, and I am afraid our company falls in that same lot as 
well.
    We are in the exploration and production business, that is 
what we do; we have no refining operations. And I will not get 
into the tax consequences. Senator Nickles covered that very 
well. Section 199 foreign tax credits could then affect us a 
whole lot. But certainly the IDCs do, and, if we do away with 
those, we will stop this march to energy independence that we 
have begun.
    These same tax provisions not only allowed us to survive 
the terrible times, the disastrous years of the 1980s and 1990s 
that eliminated about 50 percent of the independents within our 
ranks, but also allowed one other really important thing, and 
that was to allow us to try and fail and try again, and, 
certainly, that is what it took with the Bakken.
    We drilled about 18 commercial wells up there before 
breaking the code on producing this mighty oil field that is 
somewhere over 24 billion barrels. Without that ability, we 
would not have been able to do that.
    And also, let me talk about some other players. You know 
that Barnett shale field, George Mitchell's quest down there, 
George worked 16 years breaking the code on the Barnett. This 
is the largest natural gas field today in Texas. It took 16 
years to break the code to get that done. So try and try again, 
he was able to do it.
    I might just talk about a new era that we have entered into 
in American oil. It is fair to say we are transitioning from an 
era that was mobile. That oil moved. What we are entering into 
today is an immobile portion of the oil in America, and this is 
estimated to be at least a third larger than the mobile portion 
was that we have been producing in this world for 160 years.
    We are now able to do that through one thing, and that is 
precision horizontal drilling, where we will go down 2 miles, 
turn right, go 2 miles, and hit that lapel pin with a drill 
bit. It is that precision that we have developed. The 
independents are largely responsible for that development, 
myself and others. And so we are able to do that precision 
drilling, and that is what unlocked this new era that we are 
into. And it is certainly a great era.
    We have had tremendous success in these new resource plays 
across the country. Somebody aptly described the new natural 
gas supplies that we have unlocked. Some say 100 years' worth--
I think it could be even greater than that. It is tremendous. 
And we have seen the imports go down as new productions come on 
here in America. They have gone down to about 42 percent right 
now from 60 percent, a high of 60 percent. We are down to 42 
percent now.
    And it is estimated--Marshall Adkins, who is a renowned 
analyst with Raymond James, he has estimated that it will fall 
to 26 percent by 2015--that is just around the corner--and also 
will cut our trade deficit by 82 percent by 2020. So it is 
tremendous where we are headed and what it has done.
    Most importantly, we are into a cheaper price regime, that 
is, a discounted price regime for both oil and gas for the 
consumer; so, lower cost to the consumers here in America. That 
$15-a-barrel difference right now between us and bench price--
we are talking $2 natural gas here, and we are talking $12 
natural gas in China today. So it is a tremendous difference.
    But what the impact of this new production to America is, 
is better national security, drastically reduced deficits and 
budget deficits, jobs creation, good-paying middle-class jobs. 
We have seen that in Oklahoma, Texas, North Dakota, Kansas, 
Montana, wherever oil and gas is. So what we are doing is--it 
is estimated by API we could add 1.2 million jobs to the 9.3 
million jobs that are currently in our industry today by 2030.
    And then the American wealth creation, and we are talking 
wealth creation to our own Federal Government--$18 trillion of 
value in oil and gas on Federal lands. That is the estimate 
that is out there. We are not talking about creating other rich 
Arab sheiks. We are talking about at home. We are talking about 
10 million royalty owners right here in the States. North 
Dakota does not have a deficit; Montana does not have a 
deficit. These States where this is going on do not have a 
deficit.
    But I think primarily----
    The Chairman. I am going to have to ask you to sum up, if 
you could, Mr. Hamm.
    Mr. Hamm. The big thing is the psychological impact in 
America, the self-sufficiency in America, of producing what we 
need right here at home and saving American lives.
    So the unintended consequences, if we are not careful, of 
changing these rules could be devastating. We could stop this 
energy renaissance. We certainly do not want to do that.
    Thank you very much.
    The Chairman. Thank you, gentlemen, very much. I have a 
couple of questions.
    [The prepared statement of Mr. Hamm appears in the 
appendix.]
    The Chairman. First, as prompted a bit by Congressman 
Sharp's point, all the new technology is unpredicted--natural 
gas unpredicted, prices unpredicted--and the basic question is 
the degree to which tax policies really matter.
    The fracking technology was developed. Nuclear technology 
is being developed. Lots of other energy technologies are being 
developed, partly because of the entrepreneurial spirit in 
America. People see how they can make a buck. And the basic 
question is, how much do these tax incentives really matter, 
really?
    A side question there is, what do other countries do and 
does it matter, or are we just responding to political 
pressure, when really a lot of the results are the result of 
people figuring out how to do a better job?
    And I have, actually, a third question, if you could wrap 
them together. As this committee works to pursue tax reform, 
the argument is, why don't we have a more technology-neutral 
credit, 
technology-neutral deduction, some incentive to help boost 
energy production, domestic energy production, but in a way so 
we are not picking winners and losers?
    I know it is a complicated question, but if anybody wants 
to take a crack at it, those are some of the things on my mind.
    Dr. Jorgenson?
    Dr. Jorgenson. The leading point that I would like to make, 
Mr. Chairman, is that the opportunities are not so much on 
reducing the tax expenditures that you just enumerated. That is 
an important issue, but this committee over the years has 
worked to limit these tax expenditures.
    The things that we are talking about here in terms of 
expensing development and the percentage depletion and so on, I 
certainly agree with you, those should be reconsidered.
    The big issue, though, is on the side of the utilization of 
energy, in other words, a use of energy, and that is where 
energy taxes really have to play a role. We have an opportunity 
to raise revenues equal to 1.5 percent of our GDP, and those 
are entirely on the side of using. They have nothing to do with 
technology or 
technology-neutrality. That is another range of issues that I 
think is secondary relative to energy utilization.
    The Chairman. Could you focus some more on--what do you 
mean by energy utilization?
    Dr. Jorgenson. I mean burning fossil fuels, Senator. So I 
am referring to combustion of coal in the generation of 
electricity. I am referring to the combustion of oil products, 
as Mr. Hamm reminded us, in transportation, and the use of 
natural gas.
    The tax for energy would be primarily--you are a Senator 
from Montana, so you are well-aware of this--on coal. It would 
be a modest tax on oil and a very modest tax on natural gas.
    That would lead to the substitution that is underway right 
now away from coal, which is the most polluting energy source, 
toward natural gas in the generation of electricity. That is 
the great environmental opportunity of our time. It just turns 
out that it produces a lot of revenue.
    The Chairman. So it is a cousin to a carbon tax.
    Dr. Jorgenson. This is not a carbon tax.
    The Chairman. A cousin, I said a cousin.
    Dr. Jorgenson. It is a kissing cousin to the carbon tax, 
let us put it that way. This is a tax on the six criteria 
environmental pollutants which have been identified for years 
by the Environmental Protection Agency, going back to the Clean 
Air Act of 1970 and enhanced by the Clean Air Act amendments of 
1990, and so it would focus specifically on the pollution that 
is associated with these criteria pollutants.
    So what are those? Well, there are coarse particulates, 
smoke. There are fine particulates, also in smoke, but less 
visible. And the list goes on. You can fill out the rest of the 
list.
    We have to have taxes that limit this pollution. This is 
conventional pollution. We are not talking about climate change 
here. We are not talking about saving the planet. We are 
talking about saving lives, reducing illness.
    That is what environmental protection is about, and we have 
a job that is still undone that turns out to be a potential 
source of revenue equal to 1.5 percent of the GDP on the side 
of utilization.
    The Chairman. Congressman Sharp, do you have any thoughts?
    Mr. Sharp. Very quickly, to put out one sliver. When you 
were talking about new technologies, and I talked about them, 
while entrepreneurs are very important in imaginative work all 
around this country--very important--the truth is the 
government has been very important here too.
    And the tax credit on research and development, which you, 
I am sure, are more familiar with than I am, is intended to 
keep our private sector entities working, to keep our great 
research institutions like MIT, to keep our national 
laboratories figuring ahead, because we do not know which ones 
of these will work.
    Now, let us understand this extraordinary work by Mr. Hamm 
and others was facilitated by the Federal Government. I mean, 
seismic 3D, which allowed much greater visualization into the 
ground to advance us, was a major industry achievement, but it 
had Federal backing to help figure out how you do that, as well 
as some of these other technologies.
    And I think we have to be a little careful about just 
ripping all this out and thinking that it is all going to be 
done out there without somebody who will see this through 
because it was not worth it to anybody. There was no immediate 
return for a lot of these technologies. The return only 
happened after several decades.
    The second thing I would say is, it is the same with the 
production of new kinds of energy sources like wind. I doubt we 
would have anything like the wind industry we have today if the 
Federal Government had not engaged in research to bring down 
the costs and upgrade the efficiencies--not to take anything 
away from private sector activities--or if you had not adopted 
the 1992 or whenever it was, I think, in the Energy Policy Act, 
the production tax credit.
    Now, the issue is whether that is really still necessary to 
sustain this.
    The Chairman. My time has expired. It expired some time 
ago.
    Senator Hatch?
    Senator Hatch. Thank you. I have really enjoyed this panel. 
And this particular question is for the entire panel.
    A number of tax policy experts believe that the tax system 
should simply be used to raise the revenue necessary to fund a 
constitutionally limited Federal Government and not get 
involved in social engineering through the code. These experts 
suggest that the energy policy should not be run through the 
tax code.
    Now, as part of the tax reform exercise of lowering tax 
rates by broadening the tax base in a revenue-neutral manner, 
this is one approach to dealing with energy tax provisions.
    I would just like to have your thoughts on such an approach 
with regard to energy tax reform. We will start with you, Don. 
We are grateful to have you back, and grateful to have all of 
you here today.
    Mr. Nickles. Senator Hatch, just a couple of comments. One, 
tax policy does make a difference. In partial response to your 
question and Senator Baucus's question, if you no longer 
allowed intangible drilling costs to be expensed, you would 
shut down the shale revolution, the oil revolution that is 
happening in the Bakken and in every major play.
    I am on the board of a couple of companies. That is a big 
deal. If you do not allow people to expense, and they have had 
expensing--the independents have had it, frankly, since, I 
think, 1913 or something.
    Senator Hatch. Like 18 dry holes in Bakken before you hit 
the----
    Mr. Nickles. Absolutely. Senator Hatch, in response to your 
question on overall tax policy: absolutely, getting a lower 
rate, a more competitive rate, competitive internationally, is 
important. This committee has not done a lot on the 
international tax front. We have always talked about it, but it 
is really about time. And I think a greater consensus is 
building towards a territorial system. It makes sense.
    We are becoming a smaller world in international 
competition, and, frankly, we should not be giving advantages 
to our international competitors over our U.S.-based companies. 
We want more U.S.-based companies to be successful 
internationally.
    And then finally, Senator Hatch, kind of in relation to 
your comment and overall, the tax rates you want to have and, 
to some extent, to be as efficient and maybe raise as much 
money as they can without doing harm, when we reduce capital 
gains and corporate dividends to 15 percent, we actually raise 
more money for the Federal Government. I am very concerned 
about the cliff that is coming on cap gains. The rate at 
January 1st, if the committee does not do something, if 
Congress does not do something, it is going to go from 15 to 25 
percent.
    Senator Hatch. Or higher.
    Mr. Nickles. And on corporate dividends, it goes from 15 to 
44 percent--15 to 44--the ordinary rate, 39.6, 3.8 on top of 
that for the President's Obamacare, and then maybe another 1.2 
on elimination of PEP and Pease. So you go from 15 to 44.6. 
That is tripling the rate on corporate dividends for 
individuals. The corporation has already paid 35 percent.
    So this committee really needs to do some work. And from 
your vantage points and from trying to raise money, if a lower 
capital gains rate actually raised money--if you would take 
capital gains from 15 to 25 or corporate rates and triple them, 
I am afraid the government is not going to raise money. I am 
afraid you are going to lose money, and it is going to hurt 
real estate, and it is going to hurt banks that loan for real 
estate.
    Senator Hatch. You are preaching to the choir here. It was 
the Hatch-Lieberman bill that brought the rates down to begin 
with.
    Mr. Sharp. Senator?
    Senator Hatch. Mr. Sharp?
    Mr. Sharp. Just a comment. I was around, but not on the 
relevant committee, in 1986 when this theory was very popular 
about just not using the code for any social engineering. I 
think it is a good one, if we could all subscribe to it. I just 
do not know any faction in America that really believes it 
enough to act on it.
    I cannot imagine this committee will be able to not be 
inundated with everybody--we already heard one appeal to why 
some critical provision is necessary in the code. We are 
certainly a lot better off economically if we can get this 
simpler, if we can get the rates down, if we can get rid of 
some of the tax preferences.
    But I think it is a pipe dream of some outsiders who think 
that, in this complex economy, that any business organization, 
let alone the U.S. Congress, can follow that philosophy.
    Senator Hatch. Professor?
    Dr. Jorgenson. Senator, nobody is talking about eliminating 
things like percentage depletion or the deductibility of 
exploration and development. What we are talking about is 
bringing those tax provisions into line with fundamental 
economics.
    That is what the concept of tax expenditures is all about. 
So we are not talking about getting rid of incentives. We are 
talking about making them neutral, which is your point, as I 
understand, Mr. Ranking Member.
    Secondly, as I emphasized in my written testimony and in my 
oral remarks, 19 percent of the GDP as the revenue contribution 
to the Federal budget seems to me to be a reasonable target. We 
are below that level now. We are at 17 percent or below.
    As I said, 17 percent is the number for the last real data 
we have. The Congressional Budget Office has projected that for 
this year, this calendar year, that is, the number is going to 
be lower.
    So we need to have some kind of consensus. I am talking 
about unanimity. I would like to see everybody subscribe to 
this around a number like 19 percent as a starting point for 
our debate.
    But I agree with you entirely that we should have a neutral 
tax code. That is the purpose of comprehensive reform, as I see 
it.
    Senator Hatch. Thank you.
    Mr. Hamm, we will make you the last one.
    Mr. Hamm. I mentioned unintended consequences in the 
government's quest to raise more money and equalize things. I 
just want to caution that this tax could be one that vaporizes 
if the IDCs are taken away, if we stop the renaissance. And we 
are still going to raise a lot of money.
    There is $4 billion lost if drilling ceases or slows down 
considerably. We have examined our company and, absolutely, a 
third less drilling would take place without the IDCs.
    Senator Hatch. Thank you all.
    The Chairman. Thank you.
    Senator Conrad?
    Senator Conrad. Thank you, Mr. Chairman. Thank you for 
holding this hearing. Thanks for the excellence of this panel.
    I remember very fondly serving with Senator Nickles. We led 
the Budget Committee together for a number of years. One thing 
I learned about Senator Nickles is his word is absolutely gold. 
Even when it was hard to keep his word, he did, which I always 
admired.
    Congressman Sharp, it was always good to serve with you. 
You were a thoughtful member.
    Dr. Jorgenson, a wise man, we are fortunate to have 
somebody of your quality and character before the committee.
    Mr. Hamm, thank you for what you have done for the country. 
Thank you for what you have done for our State.
    I just want to point out what has happened to dependence on 
foreign energy. Since 2005, we have gone down from 60-percent 
dependent to 45-percent dependent last year. We believe we will 
be 42-percent dependent this year.
    So we have seen dramatic reduction in our dependence on 
foreign energy. Still, we are spending $1 billion a day on 
foreign sources. And it is incredibly important to the 
economics of the country that we make further progress.
    Let us go to the next slide and show what has happened to 
domestic production. And, again, I thank Mr. Hamm. Thank you 
for making the investment. Thank you for taking the risk. Thank 
you for having faith that what you and your people saw as an 
opportunity was worth pursuing, because you have helped turn 
around our domestic production in a very dramatic way, and I 
believe it is entirely in our Nation's interest, in the 
national security interest, in the national economic interest, 
and we have to pursue it.
    That takes us to the question of incentives. Mr. Hamm, you 
have focused on intangible drilling costs. Can you just tell us 
again why, in your view, that is so critical?
    You have testified here that if that were taken away, in 
your company alone, you believe there would be a one-third 
reduction in drilling. Is that what your people have concluded?
    Mr. Hamm. It is. I am not a tax accountant. I am an oil 
finder. But we do have a lot of tax accountants who work for 
us, who are on staff, and we have done a study on it, and that 
has been our consensus that, in our company, it eliminates 
about 34 or 35 percent of our drilling activity right off the 
bat.
    It takes about 7 years for us to get back to normal, some 
normal type operations.
    Senator Conrad. If that were taken away.
    Mr. Hamm. Yes.
    Senator Conrad. Let me just say that I have served on the 
Bowles-Simpson Commission, the Group of Six, tried to be part 
of efforts to get us back on track, because when you are 
borrowing $0.40 of every $1, that cannot continue much longer, 
and we have to get a hold of it.
    Part of our issue clearly--almost every bipartisan group 
that has looked at this has said that tax expenditures have to 
be part of the solution, because they are now $1.2 trillion a 
year. That is more being spent through the tax code than all of 
the appropriated accounts.
    So I personally believe we are going to have to reduce tax 
expenditures, broaden the base. I personally believe we should 
lower rates in conjunction with that to help America be more 
competitive. We need to lower the corporate rate to be more 
competitive.
    But we also need to generate some more revenue to help with 
the deficit, on top of reforming entitlements, on top of 
cutting spending in the discretionary accounts, all of which is 
going to have to be done, and none of which is really popular. 
But we have to be careful we do not throw the baby out with the 
bathwater.
    And what I hear you saying, Mr. Hamm, is that, as you move 
toward these reform steps, first of all, do not throw out 
intangible drilling costs, because that would have unintended 
consequences.
    Mr. Hamm. Yes.
    Senator Conrad. Is that what you are trying to tell us 
here?
    Mr. Hamm. That is correct. Again, I am not a tax 
accountant, but that is--we have done the study. We have 
provisions right now that encourage us to invest, and we need 
to invest heavily in the Bakken.
    For instance, up there right now, there is about, we 
estimate, 900 billion barrels of oil in place in this whole 
petroleum system.
    Senator Conrad. Nine hundred billion barrels.
    Mr. Hamm. Nine hundred billion. We right now can get, we 
think, about 2 to 3 percent of that, 2.5 maybe, 2.5 percent or 
something like that. If we could move that needle up to 5 
percent, everybody here can do the math, I mean, we are talking 
about doubling our crude reserves in America. So it is that 
significant.
    So we have a job to do and a very significant one, and we 
need the ability to do it. This gives us--this encourages us to 
do it.
    Senator Conrad. Just a last statement, if I could, Mr. 
Chairman. I have just been up talking with Secretary Salazar 
about some of the wells being drilled in North Dakota, and I 
will tell you, it is extremely impressive. It is being 
carefully done. It is being professionally done. It is being 
done in an environmentally sensitive way. It is being done with 
extraordinary technology. And so we thank you for that, as 
well.
    I tell you, I do not think any one of us would go there and 
not come away impressed with the professionalism of how it is 
being conducted.
    The Chairman. Thank you, Senator. I agree. In fact, a guy 
took me out to one of the rigs in Montana. It was the same 
person who took you and Secretary Salazar up to Riggin, ND.
    If you could answer, if I might, in just 1-sentence. What 
does it take to move that needle up to 5 percent? What is a 1-
sentence answer of what it would take to move the needle to 5 
percent?
    Mr. Hamm. Well, I think it can be done over time. There are 
a lot of things we have to--we have to figure out the next step 
of enhanced oil recovery. That is going to play a big factor, 
whether that is C02, just normal secondary water 
flooding, or whatever it is. We have to do that. That is going 
to move the needle on up.
    The Chairman. Thanks a lot.
    Senator Grassley?
    Senator Grassley. As we begin to consider what 
comprehensive tax reform would look like, it is important to 
discuss goals and objectives other than revenue collection and 
what the tax code should accomplish.
    We had testimony before our committee in December 2011 on 
incentives for alternative energy. Ms. Sherlock of CRS notes, 
``The income tax code has long been used as a policy tool for 
promoting U.S. energy priorities.''
    So it makes sense to consider whether or not our tax code 
of the future should further energy priorities. Those who want 
to isolate Federal tax incentives for alternative energy and 
put them on a chopping block need to remember that the oil and 
gas industries have received massive permanent tax breaks for 
100 years.
    In contrast, tax incentives for alternative energy have 
existed only a few decades and have always been temporary. 
These incentives first appeared in the 1970s in direct response 
to the oil crisis, and they helped to level the playing field 
for renewable resources. These incentives reduced the cost of 
capital investment for those fledgling industries that were not 
yet able to raise capital.
    Any argument made for eliminating renewable energy tax 
incentives is intellectually dishonest if it does not include a 
review of all energy tax incentives. Those opposed to 
incentives for alternative energy often fail to consider that a 
key reason to support renewable energy resources should be 
energy independence. The United States spends more than $400 
billion each year importing oil.
    Now more than ever, the United States needs to ramp up 
domestic production of traditional energy, including oil, 
natural gas, coal, and expand alternative fuels and renewable 
energies, including all of them, and I will not name them 
because you know them.
    America imports almost 50 percent--I think it is a little 
bit less than 50 percent now--of our oil. The U.S. Treasury 
pays out an average of $84 billion a year to defend shipping 
lanes to bring that oil here. These costs are never included in 
the discussion of cost-effectiveness of tax incentives for oil 
and gas as compared to alternative energy.
    For sure, we need a tax system that is less complicated, 
fairer, and will make us more competitive in the global 
economy. However, there is a long history of using the tax code 
to promote energy policy, starting with intangible drilling 
costs and percentage depletion provisions that are almost 100 
years old.
    Experts in favor of these provisions argue that these 
provisions are not tax expenditures because they just represent 
ordinary business expenses and are similar to research and 
development. Yet, the expensing of research and development 
costs and the intangible drilling costs are exceptions to the 
rule that such expenses should be capitalized and deducted over 
years.
    It seems a primary benefit of intangible drilling cost 
provisions is that they provide more cash for additional 
drilling operations, which results in more jobs. Retaining this 
provision then would seem to indicate that the tax code should 
play a role in our energy.
    So, to Senator Nickles and to Mr. Hamm, does this conflict 
with the key objectives of tax reform to lower the rates and 
broaden the base? Would not lower tax rates also provide more 
cash for additional exploring and drilling? And also, if the 
R&D and accelerated depreciation provisions are reviewed in the 
context of tax reform, do you agree that intangible drilling 
costs and percentage depletion provisions should also be 
reviewed?
    Mr. Nickles. Senator Grassley, you have not changed a bit. 
[Laughter.]
    I remember having this debate for about the last 30 years.
    A couple of comments. One, intangible drilling cost is 
expensing out-of-pocket business expense; that is, wages. You 
compared it to R&D. R&D is a credit. There is a big difference.
    R&D credit is dollar-for-dollar off your income tax, and 
the other one is a deduction for an out-of-pocket expense--
wages. And I mentioned earlier, before you arrived, I think for 
tax simplicity, you should allow every business to be able to 
expense certainly its wages.
    So I do not compare the two. I am in favor of putting 
basically everything on the table. It is exciting to think what 
you all are getting ready to do in very significant tax reform, 
and you should put everything on the table.
    But, if you do not allow industries to expense their out-
of-pocket expenses, as Harold Hamm said, you are going to have 
some real negative consequences. You will not have $2 gas.
    So I do not think this committee or Congress wants to do 
something that is going to have adverse economic impact. This 
happens to be--the shale gas revolution, as well as the oil 
revolution, is one of the best things that has happened in this 
country economically in years. Congress does not want to mess 
it up.
    But I think you ought to look at every credit, because that 
is--any credit is--by nature, it is Congress saying, we think 
this is even more valuable than the $1 you spend. You spend $1, 
and we are going to reduce your taxes by $1.
    So I am all in favor of putting a lot of credits and 
deductions and tax-exempts on the table. You have a lot of tax-
exempts that are not taxed. Tax them. Tax everything once. You 
broaden the scope a bunch by doing so.
    Senator Grassley. Mr. Hamm?
    Mr. Hamm. I agree. We capitalize all of the tubers, all the 
hardware out there, we capitalize all of that. We do write off 
the wages in regard to drilling, and the debt was in that 
regard. And it is a provision that encourages new exploration.
    And we need to look at what is going to happen down the 
road. Right now we are using 91 million barrels of oil per day. 
Here in the U.S., we are producing about 10 percent.
    If you add to the chart the petroleum liquids, to that 
chart, we are about 9 million barrels a day. So we are 
producing about 10 percent of our petroleum needs today, and 
that is estimated to go up by 2035 30 percent more to 112 
million barrels.
    If we are going to produce our part of that in the future, 
we are going to have to have incentives like we have in place 
to do that.
    The Chairman. Thank you, Senator.
    Senator Bingaman?
    Senator Bingaman. Thank you all for being here. And first, 
I congratulate Mr. Hamm and all those in the industry who have 
been so successful at increasing production. I think it is a 
good thing for our economy. Obviously, it is strengthening our 
economy.
    I have always thought that there are three primary goals 
that we have as a country with regard to energy. One is, we 
want to have an ample supply at reasonable cost; second, we 
want to have diverse sources of energy so that we are not 
dependent upon any one source; and third, we want to have an 
energy policy that does the least damage to the environment, 
does the least damage to the health of the citizenry. And so 
those are the three goals that we have out there.
    Now, on tax expenditures, I know there is a lot of talk 
about reducing tax expenditures, and strong arguments have been 
made as to why those that relate to the oil and gas industry, 
at least intangible drilling costs, ought to be maintained.
    I gather Senator Nickles's view is we ought to repeal 
section 199 for everybody, not just for the oil and gas 
industry.
    Mr. Nickles. I would think you--when you are doing 
corporate reform, having a uniform corporate rate, not a lower 
rate for manufacturers, would make sense. That is what I argued 
when I was on the committee, and I have not changed my 
position.
    Senator Bingaman. One of the things that has complicated 
our discussion of energy tax expenditures is that we have some 
that were adopted prior to the Budget Act of 1974, and we have 
others that have been adopted since the Budget Act. And by and 
large, those that were adopted prior to the Budget Act which 
relate to the oil and gas industry are permanent parts of the 
tax code.
    Those that have been adopted since the Budget Act are very 
limited in time in most cases, and they keep expiring. And 
those that relate to renewable energy have expired and come 
back, and we put them in place again and then we let them 
expire again.
    I would just be interested in the panel's view as to 
whether--whatever we do with these expenditures, would it make 
good sense--it seems to me it would make good sense to put them 
all on an equal playing field in terms of their permanence. 
And, whatever we decide makes sense for the wind energy sector, 
if the production tax credit or some lesser version of the 
production tax credit ought to be a part of our tax code, then 
we ought to put it in place and leave it there for a while, 
just as the intangible drilling cost provisions that relate to 
oil and gas production are a permanent part of the tax code.
    I do not know. Dr. Jorgenson, did you have a thought on any 
of that?
    Dr. Jorgenson. Well, as I said in response to Chairman 
Baucus, I think we need to focus on the environmental issues 
that really count, Senator, and those issues have to do with 
the utilization of energy. They do not have to do with energy 
technology.
    There is something that has not been mentioned that I think 
we need to focus on. Senator Baucus, I think, alluded to this, 
but let us put it front and center.
    In December 1998--I am reading from a publication of the 
Energy Information Administration--the cost of a barrel of oil 
in Cushing, OK--this is West Texas Intermediate--the spot price 
FOB was $11.35. In April of this year, which is the last year 
for which we have data, April of 2012, that number was $103.32, 
7 times greater. We have had an energy price crisis. You are 
all familiar with that. Everybody here has lived through this.
    That peaked with the price in June 2008--again, Cushing, 
OK, West Texas Intermediate--of $133.88.
    Now, what is the difference between this experience and our 
previous experience? These prices have not declined. In 1973, 
it was followed by a price collapse. In 1979, it was followed 
by a price collapse. In 1981, it was followed by a price 
collapse.
    This has not happened. Something has changed in the world 
petroleum markets. These prices are permanently higher. This is 
the basis for the incentives that are driving the Bakken. You 
can talk all you like about tax incentives, and I am not 
against treating these symmetrically with every other form of 
production. I am talking about oil and natural gas.
    But the point is that, once you do treat them 
symmetrically, you have to reckon with the fact that we have 
seen a sea change in the world petroleum market. We have prices 
that are 7 times as high as they were as recently as 1998. That 
is the most relevant fact about incentives that we are here to 
discuss.
    Senator Bingaman. My time has----
    Mr. Hamm. Could I respond?
    Senator Bingaman. Go right ahead. Sure.
    The Chairman. Sure.
    Mr. Hamm. Dr. Jorgenson picked the lowest year in history 
almost. In 1998, if anybody here remembers, that is when our 
friends from Venezuela were dumping oil into America, trying to 
put all the stripper producers, particularly, and high-cost 
producers of America, out of business.
    Prices before that had been in the $20 range, twice that. 
After that, they responded and came back to that after that 
point. The procedure was changed and the administration was 
changed in Venezuela. So that is how that happened.
    When the Bakken began in early 2000, the price of oil was 
about $25 a barrel. So, yes, we have seen prices spike at $147 
for 1 day and then they came back.
    So right now, we are at about an $80 price range, close to 
that. We are about $15 under the Brent price, which is 
considered a world price here in the Midwest.
    So prices go up and they go down.
    The Chairman. Thank you, Mr. Hamm.
    Senator Coburn?
    Senator Coburn. Thank you, Mr. Chairman. And thank the 
individuals testifying.
    I am having trouble getting this. Senator Enzi and I are 
the only two accountants on this committee. And the thing I 
cannot figure out is what we--the obvious is not being seen.
    If you eliminate intangible drilling costs, actually, you 
decrease revenue to the Federal Government, and here is why. 
You take away the capital for exploration, and you thereby 
decrease the amount of revenues and the exploration in this 
country.
    If you had no change in exploration and no change in 
discoveries, the tax revenue to the Federal Government would be 
the same over 10 years as it is with intangible drilling costs. 
There is no difference to what the government takes in. One is 
a delayed tax versus a fully captured tax at the time of the 
expensing.
    So I do not get what the debate is. What I do not 
understand is why, when we are sending $400 billion a year out 
of this country and we have the potential to have a stimulus in 
this country of $400 billion a year by having the money that we 
would have sent out spent here, tax-free, not borrowed to 
create a stimulus, totally tax-free, and energy independence 
for our country, why would we not do everything we can to do 
that--still within the parameters that Dr. Jorgenson set out in 
terms of the clean environment? I do not get it.
    We have the opportunity of a lifetime in this country to 
reinvigorate this country in terms of natural gas and propane 
and ethane. We are building new cracking plants. Conoco is 
going to do another one. They are employing 10,000 people in 
Texas right now to build a big cracking plant. It is going to 
put us at a major advantage over everybody in the world in 
terms of raw materials for almost everything that is made in 
this country, from plastics to chemicals to you name it.
    We have an opportunity to expand our dominance in the world 
as manufacturers on the basis of what has happened in oil and 
gas exploration. And when we talk so foolishly about short, 
little bitty things, not looking at the big picture, I have 
trouble understanding that.
    There is no question there will be no increase in revenue 
to the Federal Government by eliminating intangible drilling 
costs, no net revenue increase to the Federal Government, 
because you are going to shut down a third of the exploration.
    And by the way, they pay out $100 billion a year. The oil 
and gas industry is the largest payer to the Federal Government 
in terms of taxes that there is today. They pay, on average, 9 
percent more against earnings than any other industry in the 
country, and now we are talking about lessening that. But more 
importantly, we are talking about stealing the one thing that 
can renew America's dominance in terms of productivity and in 
terms of manufacturing edge. What has happened in the oil and 
gas industry is giving us an opportunity to regain our mojo. We 
must be very careful in how we approach this.
    Amortization is something that my colleagues need to learn 
about, what it means in terms of the accounting rule. Under 
Generally Accepted Accounting Principles, we amortize expenses. 
What we have done with intangible drilling costs is said, we 
are not going to amortize those, we are going to allow those to 
be written off, just like we did with the 100-percent write-off 
that we gave in terms of new investments this last year.
    And what has come about from that? What has come about from 
that is a tremendous increase in jobs, but, more importantly, a 
dynamite opportunity for this country to get back to where it 
was 20 years ago in terms of leading the world in terms of 
production, innovation, and efficiency. We should be careful.
    I have one question for Dr. Jorgenson. If we had $400 
billion in stimulus every year coming into this country that 
was not borrowed money and not directed by the Federal 
Government, but was in the market, what would be the net effect 
to our economy?
    Dr. Jorgenson. Senator Coburn, you are going to be very 
surprised to hear this answer, because I am going to agree with 
everything you said. This is not a debate about tax 
expenditures. That is second-order. Let us get the big picture 
in mind.
    We are not talking about big revenue here. These 
expenditures have been limited for years to the independents. 
That is what Mr. Hamm discussed with us in his written 
testimony. So I think we are all on the same page here.
    What we are not apparently on the same page about is 
essentially what the price system is doing for the energy 
sector. You are an accountant, or were, Senator Coburn, and you 
know that when you evaluate a project for a client like Mr. 
Hamm, if you ever had such an outstanding person as your 
client, I would simply say, if you ignore the price of energy, 
if you ignore the dynamism of our economy and the energy 
independence that is going to result from the new structure of 
oil prices in the world economy, you are fired. You are no 
longer Mr. Hamm's accountant, if you have done project analysis 
ignoring energy prices. And that is what we need to absorb.
    Our market-based economy is working. It is working toward 
energy independence, and it is working toward a more effective 
allocation of energy resources toward the domestic sector, 
which you have emphasized in your question, Senator Coburn.
    Senator Coburn. I would just say that as we--if the 
chairman would allow me. We have the opportunity to see oil 
prices go down if we become totally independent of outside 
resources, which gives us another boost in terms of our 
productive capacity.
    The Chairman. Thank you, Senator.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman. Thank you, 
gentlemen, for your testimony.
    Senator Nickles, as we look at all of these different 
provisions and think about what is the right tax policy, I look 
at the big five oil companies and, from my perspective, they 
are avoiding U.S. taxes by disguising what we would do here in 
the United States, which is a royalty payment, and instead of 
having a foreign royalty payment, having those countries charge 
them a tax and, in doing so, allowing themselves to write off 
these foreign taxes as a tax credit in the United States, and 
in turn, in my view, shortchanging the American Treasury and 
the American taxpayer.
    Why should the American taxpayer be in the business of 
subsidizing foreign oil exploration? Why should we not close 
this enormous loophole as we have seen the Senate vote, a 
majority of the Senate vote, to force these giant oil companies 
to pay what they owe?
    Senator Nickles. Senator Menendez, I could not disagree 
with you more.
    Senator Menendez. I am not surprised, but I still want to 
hear your rationale.
    Senator Nickles. Well, I do. You are talking about dual 
capacity. You are talking about the ability to be able to 
deduct overseas taxes against the tax amount paid.
    I think if your proposal was successful, we would not have 
international oil companies based in the United States. You 
would give such a tax advantage to Total, BP, Lukoil, other 
international oil companies that would not be facing this tax 
penalty. Double tax would be the result of your proposal, in my 
opinion, so that they would not want to be headquartered here.
    I am speaking for myself, not for anybody I work with, but 
tax policy has consequences. The windfall profits tax had 
consequences. This would have tax consequences. You would put 
us at such a competitive disadvantage internationally that the 
growth in international exploration would not be done by U.S. 
companies.
    Senator Menendez. But you would not deny that, in essence, 
what is happening here is that the same company in the United 
States drilling on Federal lands or water would pay a royalty, 
and, in essence, they are paying a royalty. The only thing is, 
they are disguising that royalty as a tax.
    Mr. Nickles. Well, I would not agree with that 
characterization one iota. Treasury has worked--IRS has worked 
for years with companies to figure out the complicated--and 
they are complicated, I will grant you that--I am going to say 
allocations. You are talking about royalties, you are talking 
about taxes, you are talking about all kinds of fees--we have 
all kinds of fees, as well--and trying to come up with a system 
that works. I think they have done that over years and years 
and years.
    But I think if you are not careful, you could have a lot of 
unintended consequences.
    Senator Menendez. Well, I would be happy to get involved in 
talking about how we tax all U.S. companies' foreign income. I 
think that would be great. But what you criticized in your 
testimony, as I read it, is the administration's attempts to 
force the big five oil companies to play by the current rules 
that all other U.S. companies play by.
    Now, it seems to me that no matter how wealthy or powerful 
the company, they should pay their fair share. The reality is 
that the big five will make $1 trillion in profits over the 
next decade.
    I think the marketplace--I think Mr. Hamm said in his 
testimony that--I think he rightfully points out that oil 
subsidies going to the big five oil companies are ``not 
providing the capital that is fueling America's march to energy 
independence.'' I agree on that view.
    The reality is the marketplace has dictated that they will 
make more than enough money to continue to pursue their 
exploration, whether here or abroad. It does not seem to me 
that they need $24 billion of our collective money as taxpayers 
when they will make $1 trillion in profits, not proceeds, over 
the next decade. I do not think they are going to deter their 
march towards oil exploration if they lose those $24 billion 
over the next decade.
    Mr. Nickles. One, I do not think it is a subsidy. Two, I 
think they should be treated fairly. And three, if you tax 
U.S.-domiciled international companies punitively compared to 
other international companies, those other international 
companies will win in the leasing, the bidding.
    The competition is fierce all around the world, and you 
will 
have less jobs, less jobs in the United States, and the U.S.-
headquartered companies will become smaller, and the other non-
U.S. companies will become much bigger, and I think that would 
be a terrible result.
    Senator Menendez. It is hard to believe $1 trillion in 
profit is not enough for a company to pursue their own 
interests.
    One final question. You seem to be, from all the testimony 
I read, and someone can correct me if I am mistaken on that--
the one witness who is willing to defend the fact that the big 
five oil companies receive the domestic manufacturing tax 
deduction--I can see how some might consider oil refining to be 
manufacturing--but other than a hole in the ground, do oil 
drillers actually manufacture?
    Mr. Nickles. Well, one, I do not defend 199, period. I 
think Congress--when you are rewriting the tax code, you should 
have a uniform corporate rate, not a lower rate for 
manufacturing. Some companies do both. Some are manufacturers, 
some are service.
    But to single out five companies and say, ``We are going to 
have a lower manufacturing rate except for you,'' I think, is 
absurd. Congress should not be picking winners or punitively 
picking losers and saying, ``We are going to give a lower rate 
for everybody but you. You are too big.'' That is just bad tax 
policy.
    Senator Menendez. Well, I agree. I will close, Mr. 
Chairman.
    Look, other than--sometimes we do want to incentivize an 
effort. Manufacturing may be one of them. I just do not 
understand how extracting oil from the ground is manufacturing, 
because that would make everybody who owns a well with water a 
water company that should be subject to getting the same 
deduction.
    I do not think it makes the type of tax policy we would 
like. But I thank you for your answers.
    The Chairman. Thank you, Senator.
    Before I turn to Senator Wyden, there is just one 
observation I would like us all to consider. Section 199 was 
enacted, as we all know, to replace something called the 
Foreign Sales Corporation and Extraterritorial Income 
exclusion, or FSC/ETI. FSC/ETI was in the law to counter the 
advantage that VAT countries had because the VAT that, say, a 
European country had was rebated back to the company. They gave 
them a subsidy for exports. So VAT countries had an export 
subsidy.
    We took our regime, FSC/ETI, to--it was taken to WTO. It 
was ruled, at WTO, illegal. So we then came up with our 199 
manufacturing incentive. It was very crude, but it was a very 
rough offset to deal with the ability of VAT countries to get a 
subsidy on exports.
    That is the origin of 199, which obviously raised the 
question of the degree to which we should try to enact 
something that deals with that VAT advantage.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman. I think it has been 
a good hearing, Mr. Chairman, and I think we have sort of had a 
wakeup call for just how tough this is going to be to actually 
write a bill.
    And let me start, if I might. For the last 5 years, I have 
worked with two very thoughtful conservatives here in the 
Senate, Senator Gregg and now Senator Coats, and another 
Democrat, Senator Begich, and we produced an actual tax reform 
bill.
    It is modeled after the 1986 legislation, where you clean 
out a lot of the clutter, hold down the rates, keep 
progressivity, and it has been scored by the Joint Committee on 
Taxation as essentially generating revenue.
    One of the toughest parts of actually sitting down--and 
Senator Gregg and I spent week after week after week for almost 
2 years--was dealing with these issues we are talking about 
here today, the energy question. And I came to those 
discussions saying--highlighting a point we have heard this 
morning: that natural gas is a huge strategic American 
advantage. People ought to understand that right at the get-go.
    And we ought to be talking about renewables, and some 
renewables that hardly ever get mentioned around here like 
hydropower and geothermal and other promising renewable 
sources. And yet, at the same time, we were actually able to 
write a bipartisan bill.
    And two of the principles that we have touched on today I 
think are going to be key, as Chairman Baucus and Senator Hatch 
lead us now into tax reform, and one of them is that we cannot 
have a double standard on tax breaks. We cannot have a double 
standard on energy breaks. And today the oil and gas production 
side gets a permanent tax break, while renewable energy gets a 
temporary tax break, and often those expire. So we are going to 
have to get rid of the double standard.
    The second issue that we have sort of touched on a little 
bit this morning is the idea that we ought to ``get rid of 
everything.'' But when you say get rid of everything, it sort 
of has an asterisk after it, because then we say intangible 
drilling costs ought to be able to go forward as well.
    So let me ask you four, because you have given us 
thoughtful and valuable testimony: what would a level playing 
field on the energy side look like so we can advance the cause 
of energy independence, but also move us away from the double 
standard and this question of let us get rid of everything, 
without putting an asterisk by it?
    Just go down the row. Level playing field. And, Senator 
Nickles, you have been at a number of the discussions that took 
place on tax reform, and you and I have talked particularly 
about the effort I started with Senator Gregg.
    So let us hear your thoughts--level playing field.
    Mr. Nickles. A couple of comments. One, I think you kind of 
threw in tax breaks, and then you said, well, renewables. There 
is a difference between deductibility and subsidies. Most of 
the renewables get subsidies. Wind, you are talking about, 
what, $0.02 per kilowatt hour multiply.
    So there is a difference between a subsidy and a deduction. 
And I think allowing deductions makes sense. Tax credits do 
not. Tax credits are basically a deduction off your taxes. So I 
would make that kind of assessment. One is much more of a 
subsidy than the other, which is basically normal operating 
procedure. You could go into greater detail, but there are lots 
of both throughout the tax code, not just in energy. I am 
talking about throughout the tax code.
    And I would also say, kind of since you are talking about a 
broader theme, tax all income once. There is a lot of income 
that is not taxed.
    So the tax code allows deductions. Expenses--you have a 
business and you write off your expenses, but in some cases, 
you get tax credits. And then in some cases, you do not have to 
report the income. You are not taxed on some income.
    Tax it. So that way, you broaden the base and unify--or the 
simpler way is to allow deductions, but not the credits.
    Senator Wyden. Congressman Sharp?
    Mr. Sharp. Well, first of all, I wish you well in finding 
the answer to that. I do not pretend to have it, and I know 
everybody in the country wants a level playing field in every 
policy area, and we have never seen one. So I am a little 
skeptical of our capacity to reach that.
    Let me say something, though. I think the harder question 
that you have been dealing with is, what is the purpose of what 
you are trying to accomplish with the nature of the provision? 
That is partly what Senator Nickles is getting at.
    These provisions are not all equal in the way they operate. 
And I do not pretend that I know this, but you folks are more 
sophisticated on it, but let me give you an example of a 
production tax credit.
    I think it was extremely important in this infant industry 
of wind. I do not have any doubt about that. What I do not know 
is how important it really is in the future and how much you 
can justify it at what level, because the goal was to buy down 
costs, to get an infant industry going, and that has happened.
    Now, I cannot tell you, I do not have the information on, 
have we reached that sort of level? That is a very useful thing 
for the future of this country and its international 
competition and our environment and everything else. I do not 
have any doubt about that.
    But I do not think it deserves a permanent, long-term 
guarantee that every kilowatt hour gets subsidized. In fact, 
that just means we are subsidizing energy consumption, which, 
in the long run, is not the smartest policy.
    The same applies to the ethanol tax credit. Once you went 
to a mandate, why would you engage in double policy that 
subsidizes, as well as mandates? In wind, we have a number of 
mandates in a number of States, the Renewable Portfolio 
Standards.
    So one of the practical problems you have is, not only do 
you need to look at these comparative things, but you need to 
see what other policies at the Federal or State level are in 
place.
    Now, frankly, at the moment, all of these policies are 
politically under attack by various forces in various States 
and around here, and so I do not know what the outcome is going 
to be. So I have only made the answer harder, but I do not 
honestly believe that the notion of whether it is permanent or 
impermanent is the answer. Frankly, I think all of these things 
need a radical and intense review about every 5 years anyway.
    Senator Wyden. Dr. Jorgenson? I know my time is up, and 
just if you two can give me an answer----
    Dr. Jorgenson. With the chair's permission----
    Senator Wyden [continuing]. On the level playing field.
    Dr. Jorgenseon. With the chairman's indulgence. Senator 
Wyden, I would like to commend you and your colleagues for your 
excellent work on tax reform. I think we all need to keep in 
mind that the Tax Reform Act of 1986 was the result of another 
bipartisan effort.
    And I would like to commend to you the consideration of 
taxes on energy use, which is not part of what you just 
described.
    In order to have a pretty level playing field, we need to 
recognize the environmental hidden costs associated with the 
combustion of fossil fuels. Taxes based on energy use are going 
to favor renewables permanently. They are going to favor 
natural gas permanently. They are going to provide a fair tax 
on petroleum permanently. And they are going to recognize the 
hidden costs associated with coal.
    We are talking about 1.5 percent of the GDP for that kind 
of level playing field.
    Senator Wyden. Mr. Hamm, quickly?
    Mr. Hamm. Good question on the double standard. Things have 
always been double standards, I think.
    The Chairman. Very briefly, Mr. Hamm. I have Senators who 
want to speak.
    Mr. Hamm. We brought a trade case here in DC at the 
Commerce Department one time when we were being dumped on by 
Venezuela and some other countries that were dumping oil here 
below their cost of production. And it was rejected, even 
though steel, cement, everything else could have gone forward, 
but not with oil. They ruled against us.
    And subsidies, just one short comment. You want to talk 
about credits and subsidies, I have drilled 17 ground holes in 
a row and, let me tell you, Webster says that subsidies are a 
payment. And I must have got to the wrong window, because 
nobody paid me. [Laughter.]
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Snowe?
    Senator Snowe. Thank you, Mr. Chairman. And thank you for 
holding this hearing. And I want to welcome our former 
colleagues, Senator Nickles and Congressman Sharp--with whom I 
served in the House of Representatives--who have had 
distinguished careers and contributed much to the issues that 
we are discussing here today both on energy and on tax policy. 
And we are very fortunate to have this extraordinary panel with 
such broad expertise in this critical area, though it is 
regrettable that we do not have a national energy policy.
    In fact, I was thinking, the last time we marked up an 
energy bill was in 2007 here in the Finance Committee when oil 
per barrel--the cost of oil per barrel was about $60. And today 
it averages $86. Last year it was upwards of $95, which is the 
issue that I want to get to today with respect to tax reform.
    And to what degree do you believe that we should have any 
tax credits for--incentives for energy efficiency and 
conservation? Because I happen to think that you can maximize, 
I think, the investments in this country, and certainly on the 
part of the consumers, if they have the ability and the 
opportunity to make those investments in weatherizing their 
home, providing insulation, providing new forms of technology 
to conserve.
    It certainly has proven to be very beneficial. Consumers 
last year paid the most for energy in the history of our 
country, $650 billion. And so, while we see the highest levels 
of oil and natural gas production in 14 years, we are also 
seeing the highest consumer costs in the history of our 
country, and I know that is true in Maine.
    The New York Times, a few months ago, did a front-page 
story on a couple who had virtually a very low income, $1,200 a 
month, and yet their home heating bill was $3,600 for the 
season. And a company came in and volunteered to insulate their 
house, and they were able to improve the efficiency by 46 
percent. It saved more than $1,200 with respect to their energy 
bill.
    The point is, I think that we need to provide some type of 
tax credits. Or, on the other hand, when you have overall tax 
reform, which I hope we will, because it is long overdue, how 
low do the tax rates have to go so that it would benefit 
consumers to make these investments otherwise if they did not 
benefit from tax credits?
    We have had tax credits for energy efficiency, and, 
unfortunately, they were reduced to $500. In the stimulus plan, 
they were up to $1,500 and a 20-percent tax credit of the 
overall costs, and it was a huge bonanza for many people in 
Maine, because we have the oldest housing stock in the country. 
And so people did make those investments because it was 
precisely that incentive. And I happen to think we should be 
encouraging that.
    But I would like to hear from you. If we do not have these 
types of tax credits, then how low do the tax rates have to go 
in overall tax reform to accommodate this?
    We could write 80-percent tax credits for companies, for 
production for oil and gas companies, and yet only 20 percent 
essentially of any type of tax credits for individuals.
    Senator Nickles?
    Mr. Nickles. You do not really want my answer, do you?
    Senator Snowe. No. [Laughter.]
    Mr. Nickles. I am not a big fan of tax credits, but the 
difference would be, one, you mentioned comparing companies to 
individuals. One is certainly a subsidy for individuals. You 
are writing the check for the individual, you are paying 20 
percent of the cost. We are not asking the government to pay 20 
percent of the cost of drilling a well.
    We are allowing individuals to expense the cost of drilling 
a well. There is a difference. That is not a subsidy, in my 
opinion.
    But the good news is, Senator Snowe, I think help is on the 
way. I think the lower natural gas prices--the Marcellus field 
in the northeast is one of the most productive fields in the 
world. It will grow. It will grow substantially. Natural gas 
will have a competitive advantage in the United States.
    I believe Harold Hamm or somebody, or maybe Congressman 
Sharp, mentioned the fact that natural gas is selling for the 
equivalent of about $12 to $20 per barrel or $2 per MCF or 
$2.50 per MCF compared to Europe, which is like 5 times as 
much, 6 times as much, 8 times as much.
    So we have a competitive advantage for your industries now, 
natural gas being much, much cheaper. And I know a lot of your 
homes in the northeast and in Maine are on fuel oil, not 
natural gas, but my guess is conversions will be taking place 
and there will be a significant savings that homeowners will 
enjoy for decades.
    Senator Snowe. We are very limited in Maine, and it costs 
about $1 million a mile to run the pipeline. So we have to have 
incentives in that regard.
    There are some areas in which they are making those 
decisions to do it, but, obviously, it is not pervasive. We are 
the most dependent State in the country on home heating oil.
    Mr. Nickles. I can remember your many, many efforts for 
low-income energy assistance over the years and wrestling with 
you on some of those issues on the Budget Committee and so on, 
and I compliment you for your effort and for your 
representation.
    I do think, though, the network expansion through the 
distribution lines is increasing the connections so more and 
more people can take advantage of this very abundant, 
plentiful, cheap resource that we have in the United States.
    Senator Snowe. Congressman Sharp?
    Mr. Sharp. Well, Senator, I certainly, one, believe it is 
important in this Nation for us to put an emphasis on 
efficiency for economic, as well as environmental reasons. And 
certainly, if we are going to have a tax code--as it is today, 
it is stacked full of all kinds of incentives--this is a good 
thing to do.
    But I do not think that is the best long-term strategy. One 
thing is, we need to help Americans understand that there are 
going to be radical shifts in price and they need to prepare 
for them as they make home decisions and all kinds of others, 
and to pretend otherwise undercuts them. And that is not what 
you have been doing, but I am suggesting that is what often 
happens.
    The second thing is, if we are going to look at these 
incentives, you know better than I do that there are quite 
different impacts on different homeowners and different 
consumers. It depends on where you are. Did I buy my home 
already upgraded and I have already paid for all these 
upgrades, or am I the one who gets the taxpayer to pay for my 
upgrades?
    And then we get into the incentives--I think they have all 
now expired--for purchasing vehicles that are huge, from an 
individual's point of view. I do not think they can be 
justified in terms of helping the consumer in that case. I 
think the only legitimate justification is the effort to try to 
bring some new technologies into the market or to bring an 
infant industry into place.
    But to be frank about it, I prefer the general approach 
that Dr. Jorgenson has been recommending, which helps us answer 
some of these broader questions.
    Dr. Jorgenson. Senator, I think we have to recognize that 
efficiency is an engineering concept, a technical concept. And 
I think this committee ought to shift its focus to cost-
effectiveness; in other words, making the best use of every 
taxpayer dollar.
    Now, addressing the question you raised about efficiency 
and conservation, the price system works. It produces massive 
energy conservation. Oil use in this country has plummeted over 
a period extending over decades. It is now 50 percent of what 
it was as recently as the 1970s. That is all due to energy 
prices.
    Prices work in the home fuel market, as Congressman Sharp 
just reminded us.
    I am reading from a publication of the Energy Information 
Administration, which I quoted earlier. I am looking at U.S. 
Henry Hub natural gas price histories. My geography is not all 
that great, and it certainly is not very recent. I believe that 
Henry Hub is in the State of Oklahoma.
    That is an area where prices of natural gas were as high as 
$12.30 per 1,000 cubic feet as recently as 2008 in the midst of 
the oil price run-up. And as Senator Nickles reminded us, it is 
now $2.43. That is the figure from May 2012, which is the 
latest figure.
    We have to use the price system. That is the whole idea of 
using a tax-neutral approach in order to achieve our energy 
goals, just like our other goals, and the price system is 
working, Senator.
    The Chairman. Your time has expired.
    Senator Snowe. Thank you.
    The Chairman. We can go back, if you want another round.
    Senator Snowe. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Carper?
    Senator Carper. Thanks, Mr. Chairman.
    I just want to say to Senator Nickles, my old compadre--
young compadre--and Congressman Sharp, a good friend from the 
House: it is just great to see both of you.
    Dr. Jorgenson, I do not know either you or Mr. Hamm well, 
but if each of you is half as good as I am hearing from my 
colleagues, this is a great panel, and we are delighted that 
you are here today.
    I want to just follow up a little bit on what Senator 
Coburn was saying earlier. I think there is reason to be 
optimistic about the future of our country for a number of 
reasons, but one of those is--and he alluded to some--we have 
become Saudi Arabia. We are and have been for some time the 
Saudi Arabia of coal. We are now apparently the Saudi Arabia of 
natural gas.
    I understand that we have become a net exporter of oil, 
and, while we are not the top producer of oil in the world, I 
think we might be number three or so. But we apparently have 
more drills going today, more wells producing today, than I 
think maybe the rest of the world combined, which is pretty 
amazing.
    I chair the subcommittee that deals with nuclear safety, 
and we have four brand-new nuclear power plants being built in 
this country for the first time in 25 years, and I am 
encouraged with the technology and the safety of the technology 
it provides.
    CAFE, we had adopted CAFE legislation, fuel efficiency for 
vehicles, in 2007. Congressman Sharp, that was something I know 
you had a whole lot of interest in, and we appreciate your help 
on that legislation. But we are ramping up fuel efficiency 
standards for cars, trucks, and vans to I think about 36 miles 
to a gallon by 2016, and I think by over 50 miles per gallon by 
about a decade after that.
    Our friends from GE, I think, are online for building a new 
solar energy product out in Colorado that is going to be at 
grid parity, we are told, by 2016. And we actually have the 
ability to use natural gas, I think, to not just supplant coal 
and make emissions of utility plants cleaner and safer, more 
environmentally friendly, but also to use it to supplant the 
use of diesel fuel in a lot of our large vehicles. That is all 
pretty encouraging stuff, very encouraging stuff.
    We have seen across the country windmill farms deployed. 
They are producing a lot of electricity. Senator Snowe and I 
have been working on an idea to try to incentivize the building 
of windmill farms off of the east coast to capture the wind and 
use a lot of that to supply some of the hybrid vehicles that 
are being built, and going to be built in the decade to come.
    One of our ideas is, rather than just providing a 
production tax credit, which is what we use to incentivize the 
building of windmills onshore, what we are suggesting is a 
different kind of investment tax credit, which would be good 
for a limited period of time--a limited offer. And it would 
basically say the first 3,000 megawatts of generating capacity 
developed off of our coast, or however many windmill farms were 
developed that would use it--first one, second one, third one--
when you get to 3,000 megawatts, that is it, that is when the 
tax credit goes away.
    But the idea is just to get it started, show that we can do 
this, and we can do it successfully.
    I would just ask, if I could, Dr. Jorgenson, would you and 
Congressman Sharp just respond to that idea? If we just did 
rely on the production tax credit, we are not going to build 
any windmill farms off of the U.S. anytime soon.
    The investment tax credit is what is needed, and this is a 
different kind of approach, not a permanent one, but as I said, 
again, a limited time offer. What do you think?
    Dr. Jorgenson or Congressman Sharp?
    Dr. Jorgenson. My only question, Senator, is how you are 
going to pay for this. That is all. I think that we have to 
recognize the fact that the budgetary climate, like the world 
oil market, has undergone a major change, and we need to take 
that into account when we are discussing tax policy, when we 
are formulating tax policy, and when we are enacting tax 
policy.
    And so I think we need to ask ourselves, is the market 
doing the job? Is it sufficient to bring forward these 
resources that you are talking about? And I think the fact is 
that it is bringing forward enormous resources in oil, in 
natural gas, and in renewables.
    There are many applications of renewables, mainly wind 
energy, which you and the Senator from Maine have been focusing 
on, which are cost-effective independently of any sort of tax 
breaks. And higher oil prices will make them cost-effective for 
a very, very long period of time.
    Senator Carper. Congressman Sharp?
    Mr. Sharp. Senator, I am a great admirer of all your 
considerable work on these issues. I am not really prepared to 
comment on what you are asking, because we know that it is a 
lot higher cost to do offshore than it is to do onshore, and I 
think there is a serious cost-effectiveness question that I am 
sure you are looking at as you consider just how far we ought 
to go.
    Of course, you have already taken into account that you 
assume this is an infant industry that you are only trying to 
get----
    Senator Carper. Just get them started.
    Mr. Sharp. But I am not sure how much we really have to 
learn about offshore, since so much of it is going on in 
Europe. What we see happening in China, what we see happening 
in Denmark, what we see happening in Great Britain, these can 
be of benefit to us--they are not always competitive to us--and 
we can let them subsidize and buy down the cost of 
technologies, and then we can buy up the technologies earlier.
    So I am not as quick to endorse that everything has to be 
done in America, much as I love this country and believe we 
ought to be the source of a lot of the technology.
    Senator Carper. With respect to nuclear power, one of the 
reasons why we are building some new nuclear power plants, as 
you know, is because we provide some financial assistance and 
encouragement through the Federal Government.
    Let me go back to something that you said, Dr. Jorgenson, 
if I could. I think you said we have seen a sea change in the 
price of oil. And here in this country, I think we produce 
about 2 percent of the world's oil. However, about 2 percent of 
that is in oil reserves, and we use about 20 percent on a daily 
basis of the oil that is consumed in the world.
    When you look forward, if we look at China coming online, 
we bought 11 million, 12 million cars last year, with this year 
expecting to sell maybe 14 million, maybe next year 16 million, 
in China. I think last year they caught up with us, and they 
have a whole lot more people, as we know.
    What are the implications for that consumption of oil in 
those countries? What are the implications there for the price 
of oil across the world?
    Dr. Jorgenson. China is not alone, but the point is that 
China and India and many countries which have finally 
discovered the key to economic growth are going to be the 
source of growth of demand for a very, very long time to come. 
That is what is behind the sea change that has occurred in 
world petroleum markets.
    And we need to respond to that, and we will respond to it. 
We will respond to it by having more energy efficient vehicles. 
We will respond to it by using hybrid vehicles when that is 
appropriate. And we will respond to it, as I said to Senator 
Snowe, by energy conservation.
    That is exactly what the price system is going to do. It is 
also going to push us very strongly in the direction of 
domestically produced fuel, natural gas that is available now 
in large quantities due to the very highly skilled work that 
has been done by Mr. Hamm and his colleagues in the oil and gas 
industry.
    Senator Carper. Now, when the U.S. auto industry and others 
who sell cars, trucks, and vans here look at the ramp-up in 
fuel efficiency standards in the next 10-15 years, I think they 
have a concern that since we do not have a very high tax--at 
least Federal tax; our State tax is really on motor fuels--they 
are concerned within the auto industry that there is not going 
to be an incentive for people, and the price of oil will go 
down, and there is not going to be much of a market incentive 
for people to buy energy-efficient cars. So we need to keep in 
place the tax credits that we have to incentivize some of those 
purchases.
    Would your message to the auto companies be, ``Chin up?''
    Dr. Jorgenson. Well, let me just say, on tax policy--let us 
just focus on that--my proposal that I described here for an 
environmental tax system would raise the taxes at the Federal 
level on motor fuels by about $0.39 per gallon at the pump. We 
are talking about an incentive to conserve. We are talking 
about an incentive to use more efficient vehicles. We are 
talking about achieving those goals, not just writing them into 
the law.
    Senator Carper. Over what period of time would that be?
    Dr. Jorgenson. This is a period of time--well, this is an 
incentive that is going to be permanent, and we know that 
that----
    Senator Carper. In terms of a ramp-up, it would be 
implemented all at once or over a period of months or years?
    Dr. Jorgenson. I would certainly put it--we are not talking 
about big numbers here; $0.39 per gallon, I think that is 
something that could be introduced in the code tomorrow.
    Senator Carper. Thanks very much.
    Mr. Nickles. You probably do not want to introduce it, not 
before November. [Laughter.]
    The Chairman. Let me just ask a question that came to my 
mind, Dr. Jorgenson. You keep talking about letting pricing 
determine technologies and development, and I understand that 
is a big, huge driver. And I agree that oil demand has pushed 
up commodity prices significantly, whether it is China, India, 
or other developing countries.
    But the question comes down to price volatility. 
Essentially, I presume you are saying there is not much the tax 
code can do about price volatility. If prices are going to be 
volatile, they are going to be volatile.
    Look at coal. The demand now is soft with demand for 
natural gas rising. It is just that the world is so 
complicated. There are so many different dynamics worldwide, 
many of them unexpected.
    So I presume when you say, let price decide, you are 
saying, let the price be what it is and let entrepreneurs and 
developers just do what they can and develop whatever they can 
given the price signals they have seen.
    Dr. Jorgenson. Well, I would like to go back to a point you 
raised earlier, Senator. You said that we need to have a 
diverse source of energy supply, and we do in this country. 
That does not mean it has to be the same diverse supply every 
year or every decade. Things change, including technology and 
supply and tax policy. And so we need diversity. That is 
something that contributes to low volatility.
    But this country has, as Mr. Hamm would be the first to 
tell you, a very competitive industry on the supply side of the 
fossil fuels. We are a very competitive industry in the supply 
of renewable energy sources, both solar and wind, and, 
therefore, you should think, as you just suggested, in terms of 
relying on these very, very well-structured markets.
    But they are not going to do the job by themselves. That is 
where we come to the hidden costs of energy combustion that I 
have harped on over and over in this hearing. And so we should 
not say that free markets are the answer, but nobody here has 
said that. I have not heard a single voice in support of that 
on the panel or from the Senators here who are present.
    So we need to let markets work, but we have to recognize 
the fact that the government has a role, and I have tried to 
spell out what that should be.
    The Chairman. Mr. Hamm, what should the government do with, 
to use Dr. Jorgenson's term, externalities, that is, those 
costs, environmental costs, associated with fossil fuel?
    Mr. Hamm. Well, certainly, I think the marketplace will let 
it work, and it has worked. More supply brings down the price 
of oil. We see that that is coming on.
    The Chairman. But the environmental costs of fossil fuels.
    Mr. Hamm. The environmental costs of fossil fuels, as I see 
it, in our business at least, are minimal. We are drilling up 
there with eco pads, we are not disturbing much of the land. We 
are very good stewards of the land. We have small costs of 
production of these fossil fuels as far as environmental issues 
go.
    The Chairman. Senator Hatch? Thank you.
    Senator Hatch. I want to thank all four of you for being 
here today. I have been listening very carefully, and I want to 
compliment you, Mr. Hamm, for having the guts to do what you 
have done.
    I agree with you on the intangible drilling and development 
cost deduction. It has been a tremendous benefit for the oil 
industry, at least the independent oil industry in this 
country, without which I do not think we would be as far along 
as we are.
    The real question that we have is, should we have any of 
these tax expenditures or deductions in lieu of the fact that 
we might reduce corporate tax rates low enough so that that 
would take care of it?
    But in your industry, it is a special industry, there is no 
question about it, and there is a lot of risk involved, a lot 
of money involved. You can go broke easier in your business 
than almost any business I know, and I just want to compliment 
you for what you have been able to accomplish and the guts that 
you have had to get the things done.
    We would like you to weigh in and help us to understand 
what we really do need to do with regard to tax reform.
    Professor, I have enjoyed your remarks very much today.
    Dr. Jorgenson. Thank you.
    Senator Hatch. And of course, Phil, it is great to see you 
again, and Don. We appreciate all that you have had to say, 
both of you. And this has been a very interesting hearing for 
me.
    So with that, thank you.
    The Chairman. Thank you, Senator. I might say, though--and 
I do not know who first coined this phrase--there is no such 
thing as a free lunch. But I am thinking of the tremendous gas 
development in eastern Montana, but also the very significant 
impacts on the community--schools, waste water treatment, clean 
water, housing, huge adverse impacts.
    Now, there are some very positive impacts, the revenue and 
so forth, but there are huge adverse impacts to these local 
communities. Law enforcement just cannot keep up with the boom-
and-bust that is developing in, let us say, eastern Montana.
    So I do think we all have a role to play together to kind 
of help each other with respect to those provisions.
    Let me ask this. Is there anything else that anybody wants 
to say, or has anybody said anything so outrageous that it 
needs a response, from either side of the table?
    Dr. Jorgenson. Could I correct an error?
    The Chairman. Sure.
    Dr. Jorgenson. The Henry Hub is in Louisiana. I realize 
everybody else here knew that. I had to read it.
    The Chairman. Everybody knew that. [Laughter.]
    Thanks, everybody. This is, obviously, a very complex, 
extremely important subject. It is not the last time we are 
going to be dealing with it. So, I would just urge us to keep 
working together as we solve it.
    So thanks very much for taking the time. The hearing is 
adjourned.
    [Whereupon, at 12:07 p.m., the hearing was concluded.]



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