The 2012 presidential campaign is heating up, and so is the debate around energy taxes. There may be little political cost to advocating for higher taxes on oil and gas producers, but slamming American energy companies with tax hikes is simply bad policy.
A recent report by the Center for American Progress attempts to outline “Big Oil’s” benefit in Romney’s tax plan. However, amid its criticisms of international income and foreign profit, CAP fails to note that the oil and gas industry is leading our economy when it comes to capital invested domestically. As noted in the liberal Progressive Policy Institute’s recent analysis of domestic investment, American oil and gas companies — including ExxonMobil, ConocoPhillips, Chevron, and others — are at the top of the list of “investment heroes,” with more than $36 billion invested domestically in 2011.
Following the recent earnings reports from U.S. energy firms, critics have been quick to place demands on the government to punish oil and gas extractors. Furthermore, critics have routinely been calling for an end to “subsidies” for big oil. But those “subsidies” aren’t subsidies at all; rather they are standard tax provisions. Let’s not confuse the two.
These so-called subsidies are actually legitimate tax provisions that are available to a broad array of industries, not just oil and gas firms. Opponents are quick to mention manufacturing income deductions under the widely acclaimed section 199 in the U.S. tax code. However, make no mistake, section 199 provides no subsidy but does provide a deduction available to nearly every American manufacturer. To take it one step further, the deduction in section 199 is actually less for oil and gas producers than for other manufacturers.
As the political back-and-forth intensifies in the two-month stretch leading up to Election Day, let’s keep in mind that tax incentives for oil and gas firms assist in providing 9.2 million jobs to Americans throughout the country. Contrary to popular belief, section 199 is not a special benefit given to oil and gas producers from big friends inside the Washington beltway. The oil and gas industry as a whole pays the government $86 million a day in taxes. Oil and gas is taxed at an average rate of more than 41 percent — far beyond the 26.5 percent average for the rest of the S&P Industrial Index.
Taking a closer look, last year ExxonMobil paid $27.3 billion in taxes while Royal Dutch Shell paid out $24.5 billion in taxes. Chevron paid $17 billion in taxes, followed by $16 billion paid in taxes by BP, and $10.6 billion paid in taxes by ConocoPhillips. These are not meager numbers. Critics claim that the industry takes “tax handouts,” but they fail to acknowledge the massive tax contribution made by the industry each year.
Oil and gas firms benefit the U.S. economy in a number of ways. Hiking taxes on them would further cripple economic growth, job creation, government revenues, and energy exploration. Greater energy independence would be set back as well. Moreover, raising taxes on energy firms in the U.S. would lead not only to reduced returns for shareholders, but also less capital investment.
It may seem simplistic to say, but we need the U.S. economy to grow. America’s oil and gas sector is growing and investing and hiring. Why would we want to raise taxes on one of the few sectors experiencing growth?
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.