Obama's Tax Proposal Would Only Hurt American Energy Competitiveness

The president's proposal would dramatically disadvantage American energy firms.

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Pete Sepp is executive vice president of the National Taxpayers Union.

In an effort to ensure U.S. industries remain competitive in the global market, our tax system offers limited protections for American companies, including energy firms, from the perils of double taxation. Though many anti-oil activists (and their allies in the current administration) attempt to diminish these vital tools when it comes to our fossil fuel industry, the facts point to the contrary.

Far from qualifying as selective or excessive government fiscal policy, many of the tax rules President Obama brands as "oil subsidies" are actually credits available to any U.S. manufacturer--from microprocessor producers like Intel to coffee roasters like Starbucks to conglomerates like GE. Notice, though, that the administration didn't bother to specifically go after any of those sectors in his State of the Union last month.

Consider this: since 1981, oil and natural gas firms have paid more in taxes than their shareholders have earned in profits. Specifically, between 1981 and 2008, the oil industry paid more than $388 billion to the federal and state governments in corporate income taxes alone, not counting excise, property, and other taxes. It also paid almost twice that amount, $683 billion, to foreign governments. That helps explain why ExxonMobil recorded a larger income tax expense than any other U.S. company last year, some $17.6 billion or 47 percent of pretax earnings. An additional burden--such as the $36 billion tax hike laid out in the White House FY2011 budget proposal--would dramatically disadvantage American firms in our competition with China's CNOOC and Venezuela's Citgo.

Federal tax policy doesn't operate in a closed loop. So the fact that ours is the only major country in the world to tax foreign income significantly impacts domestic investment and economic growth. A Tax Foundation review of recent research determined that relative to other nations, the United States offers few energy subsidies, despite being a major oil-producing nation. By ensuring U.S.-based oil and natural gas multinationals are not taxed again at home on income already taxed abroad, current "dual capacity" provisions give our firms a fighting chance to compete on a global playing field.

The elimination of these protections would also further handicap our already bleak employment rate. One 2010 study estimated the economic costs of repealing tax credits such as "dual capacity" and Section 199 (a provision available to all American manufacturers to encourage domestic employment) would total over 154,000 jobs lost in 2011 alone, not only in the energy sector but across the whole economy.

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Such a move would also result in more than $341 billion in lost U.S. economic output and in excess of $68 billion in lost wages nationwide.

IHS-CERA Chairman Daniel Yergin warns that if the White House proposals are passed, the unintended consequences "would likely accelerate the shrinking position of U.S. companies internationally." His 2010 report estimated repeal of dual-capacity would make the U.S. the least competitive energy sector in the world--save India.

If our national leaders intend to "win the future," we will need policies that are truly progrowth. Systemic tax reform for all businesses, emphasizing lower rates, simplicity, and fairer rules for foreign-based income, could obviate provisions like Section 199 and dual capacity credits. But until Washington takes this holistic approach, proposals that single out an industry for punitive taxation deserve defeat.