One of the most effective parts of the 2017 Tax Cuts and Jobs Act was reducing the corporate income tax rate to 21% from 35%.
Although that lower rate remains in effect, most of the other provisions of that act expire at the end of this year. To help pay for continuing those provisions, which are estimated to reduce government revenues by $4.5t, Republicans are considering capping or even eliminating the ability of businesses to deduct state and local tax payments from their federal tax bills, called C-SALT, much as individual taxpayers can deduct only $10,000 of their state and local tax bills. In other words, to preserve the tax cuts, Republicans may raise the corporate income tax rate. Doing so will hit fossil fuel producers especially hard.
Fossil fuels are fundamental to the US economy and consumer wellbeing. Capping or eliminating C-SALT will reduce the profitability of extracting fossil fuels. Consequently, it will cut production, even though the administration signed an executive order on its first day to encourage more energy production.
Oil and gas producers and coal mining companies already pay billions of dollars in royalties (known as severance taxes) every year that enrich state coffers. In fiscal year 2024, for example, Texas collected about $8.5b in royalty payments from oil and gas producers. South Dakota collected about $3.1b and New Mexico brought in just under $2b. In its just-ended legislative session, New Mexico also raised the royalty rate on oil and gas producers from 20% to 25%, the same as Texas. Royalties for major coal mining states, such as Wyoming, which produced almost 45% of the nation’s coal in 2024, and West Virginia, which produced 15%, range from around 6% to 18.75%.
If C-SALT were to eliminate all state and local tax deductions, then the effective royalty rate on oil and gas production in New Mexico would jump to just over 30%, the highest in the country. Oil and gas producers in the New Mexico portion of the Permian Basin—the most productive region in the entire country—would likely relocate across the border in Texas. Producers would still be worse off, but not as much as if they remained in New Mexico.
Decreased production will lead to higher fossil fuel prices, which will reverberate throughout the economy. Not only will oil and gas prices rise, but so will electricity prices. In 2024, gas and coal accounted for almost 60% of the nation’s electricity. Although wind and solar have accounted for a growing share of generation over time, generating almost 16% of US electricity, the prospects for continued wind and solar growth are limited, owing to the huge quantities of land they require, the need to build thousands of miles of high-voltage transmission lines to deliver wind-and-solar–generated electricity to cities and towns, and the need to provide back-up for the times when the sun does not shine and the wind does not blow.
Rather than raising the corporate income tax by enacting C-SALT, a far better solution would be to eliminate the corporate income tax entirely. Taxing corporations is not a source of free money because corporations pass taxes on to consumers through higher prices and to investors through lower returns.
Eliminating the federal corporate income tax (and, ideally, state corporate income taxes) would raise wages and lower prices for goods and services, benefiting consumers and other businesses. Individuals would have more money to spend and invest, and businesses would have more money to grow and create new jobs. Instead of imposing costly tariffs on foreign imports, eliminating the corporate income tax would also spur foreign companies to relocate to the US, leading to additional economic growth. Again, the result would be lower prices, rather than higher ones.
In 2024, the federal government collected $490b in corporate income taxes, more than double what was collected in 2022. Yet corporate income taxes were just 6.5% of all taxes collected.
No country can tax its way to prosperity and growth. Extending the Tax Cuts and Jobs Act makes economic sense, as does reducing the stratospheric US deficit. But crippling energy production by raising taxes on energy producers, and corporations in general, is not the way to go about it.
Jonathan Lesser, PhD, is the president of Continental Economics and a senior fellow with the National Center for Energy Analytics.
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