As President Obama has finally decided to join the heated and thus-far-failed national debt talks, the administration and some in Congress are insistent on tax hikes for oil and gas companies. Unfortunately, this political gamesmanship may result in higher energy prices, decreased domestic production, increased reliance on foreign oil and a further crippling of our already fragile economy.
The proposal to prevent the five largest U.S. oil companies from benefiting from the longstanding tax provisions that are available to many manufacturing businesses would place our energy security at risk and put U.S. companies at a competitive disadvantage to their mostly state-owned foreign competitors. It would also do a good deal to aggravate the already precarious financial situations of American motorists, who could see a large increase in gasoline prices. It would jeopardize thousands of jobs, too.
Further, eliminating the dual capacity foreign tax credit, which prevents U.S. energy companies from having to pay both U.S. and foreign taxes, undermines our competitiveness in international markets. If enacted into law, this proposal would mean that Russian, Chinese, Italian and Brazilian firms operating in the United States would be subject to a lower tax rate on their U.S. income than American firms. This would essentially amount to a foreign oil dependency act, making the United States less able to produce domestic energy and more reliant on other countries for oil.
The path down which President Obama and some lawmakers are intent on taking the United States is one of economic ruin. The fact is that the oil and natural gas industry sees less of a profit per dollar than the average U.S. manufacturer: 8.3 cents compared with 8.5 cents. In 2007, the industry paid more than 40 percent of its net income as taxes, while other manufacturers paid an average of just 26.7 percent. What’s more, oil and gas projects require far longer lead times and larger amounts of capital than the projects of many other sectors. The deductions currently afforded to the industry help offset those risks, shielding consumers from having to absorb the cost of industry losses.
Economic analyses by consulting firm Wood McKenzie, as well as economist Dr. Joseph Mason, have found that these types of tax proposals would reduce domestic production by up to 600,000 barrels per day and put 165,000 jobs at risk. Wood McKenzie estimates that such tax hikes would actually cost the government $128 million in lost revenue. Given the precarious state of our economy, why would we enact tax hikes that cost jobs and decrease our domestic energy production at a time when Americans are feeling the pain of high gas prices?
Roping the issue of tax increases into budget talks has less to do with paying down the debt than it does with a looming presidential election. Attacking oil companies may be a rite of passage for some in Washington, but the people who will be hurt by these harmful policies are the ones who are already suffering in this weak economy. Rather than target specific industries to score political points in a budget battle, our leaders need to replace the burdensome and convoluted tax system with one that provides equal treatment for all American companies and encourages investment and growth.
Unfortunately for anti-energy lawmakers, slashing tax deductions for select companies and industries that make affordable fuel a possibility for millions of American consumers would do nothing to lower the national debt. It would, however, reduce the capital we have available to invest in developing new domestic energy supplies.
Federal spending has doubled over the past decade, while revenue has failed to keep pace. We are in debt because of massive, zealous government overspending, not because of the profits of five energy companies. Targeting oil companies in the debt discussion is a red herring that will only exacerbate our economic woes.
Thomas J. Pyle is the President of the Institute for Energy Research.