Higher energy taxes worsen state pension woes

Margo Thorning Senior Vice President, ACCF
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Retirement funds are in trouble across the U.S. Like most private sector nest eggs, state pension funds have not performed well over the last two years and, as a result, are now critically underfunded. The forecast is already bleak and will only further deteriorate if new energy taxes proposed by President Obama’s administration are put into effect.

According to a new study by the Pew Center, the total gap between what states are obligated to pay for their pensions and what they can actually afford to pay now stands at nearly $1 trillion. In 10 states, more than one-third of total pension liabilities remain unfunded, and in the worst two states—Illinois and Kansas—more than 40 percent of pension obligations are now unfunded. And these states aren’t alone. In 2008, the last year for which data was available, only four states had sufficient resources to pay what they owed. This is a sharp downturn compared to 2000, when over half of all states had fully funded pension systems.

Adding insult to injury, some federal lawmakers are considering raising taxes on U.S. oil and gas companies—an industry which boosts the retirement portfolios of tens of millions of hardworking Americans. If Washington follows through on these short-sighted plans, many state pension shortfalls will likely get even worse.

Many retirement funds depend heavily on oil and gas stocks. Even though oil industry executives are a popular whipping boy for Congressional committees, in reality it’s city firemen, school teachers, and other Main Street Americans who own these companies and will ultimately bare the brunt of the lash.

Analysis done in 2007 by economic adviser Dr. Robert Shapiro revealed that executives and other industry insiders owned a mere 1.5 percent of U.S. oil and gas stocks. The remaining 98.5 percent of shares were owned by individual investors, mutual funds, pension funds, foundations and other asset management companies that build the wealth that supports every day Americans during retirement.

In other words, just about everyone in the United States who owns mutual funds or participates in some kind of retirement program has a stake in U.S. energy producers. As such, their pain is not our gain.

Yet energy companies continue to be the target of politically motivated attacks. Earlier this year, the Obama administration proposed levying nearly $40 billion to the already substantial tax burden borne by the American oil and gas industry. Millions of American workers, retirees and their family members would be directly impacted by this plan—as would state and local government entities and the public servants who make them run.

The recession has already stretched state budgets to their breaking points; taxing away revenue needed to fund pension obligations would take money from other vital programs and could threaten the retirement benefits expected by workers both past and present. Police, social workers, and many others who have dedicated their lives to public service stand to lose the full retirement savings they have been promised.

This presents a real problem for state governments. Pension revenue will be lost as a result of punitive taxes on energy companies, which in turn will make meeting pension obligations that much more difficult, and make many states already serious budget issues even more severe.

Recklessly increasing taxes on American oil and gas companies is a mistake on many levels. First, 30 of our 50 states produce oil or natural gas; the industry is responsible for over 9.2 million full- and par- time jobs in the U.S. according to a recent study by PricewaterhouseCoopers. Increasing taxes on the industry is likely to reduce jobs and economic activity in these states and decrease state budget receipts.

Second, higher taxes would diminish domestic energy production and increases our reliance on foreign oil powers. Third, higher taxes would tend to raise fuel prices for consumers and businesses, stifling economic growth and diminishing job creation. Finally, they would unfairly penalize the millions of American workers who have invested their life savings in this vital segment of our economy.

Instead of relying on rhetoric, politicians need to focus on finding solutions that won’t harm the very people they are trying to protect.

Dr. Thorning is the Senior Vice President and Chief Economist of the American Council for Capital Formation.