Overtaxing Oil Comes at a High Cost

A small gain in tax revenue will cost a big loss in jobs.

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In the current stalemate on raising the debt ceiling, President Obama has ratcheted up the rhetoric against the American oil and gas industry.  Big Oil, he insists, benefits from generous federal subsidies and enjoys favorable treatment from the current tax code.  The president maintains that increasing taxes on these companies will help close the federal deficit while avoiding any adverse economic consequences.

Take a look at the numbers, however, and it becomes clear that raising taxes on the American oil and gas industry has nothing to do with the federal purse and everything to do with the president's desire to see energy prices necessarily skyrocket.

The president proposes forbidding American oil and gas companies from taking advantage of the Section 199 tax deduction and the Dual Capacity Taxpayer credit, both of which are available to a wide array of American companies. Section 199 allows American companies to deduct capital expenses for producing goods and creating jobs here at home from their pre-tax income.  While every other American manufacturing company may deduct up to 9 percent of their pre-tax income, the five major integrated oil and gas companies are already capped at 6 percent. 

The Dual Capacity rules prevent American companies from being taxed twice on income earned abroad.  Rules finalized over 25 years ago hold American firms to a strict standard as to how much they can deduct from their American income tax liability.  President Obama's proposal would force American firms operating abroad to be subject to double taxation while their foreign competitors are able to avoid such harsh treatment.  Essentially, the plan puts American oil and gas companies at a competitive disadvantage to energy companies around the globe.

[See a collection of political cartoons about gas prices]

All of this may be tolerable to some if it results in a large, long term gain in federal tax revenues for the federal government.  But even on that front, the president's proposals fail to deliver.  A new study this week by Louisiana State University Endowed Chair of Banking and nationally renowned economist Dr. Joseph Mason finds the administration's proposal to carve out U.S. energy firms from receiving these tax deductions would have a net negative impact on federal revenues.

President Obama's discriminatory tax policy would take an extra $30 billion from American oil and gas companies.  That increased tax burden will have to be offset by a combination of reducing workers' pay (either through wage cuts or layoffs); reducing the returns on shareholders' investments (through lower share price or dividends); or reducing its purchases of inputs.

Using the U.S. Department of Commerce's modeling system, Dr. Mason finds that repealing tax deductions for American energy manufacturers would result in:

• $30 billion in Federal tax revenue at the expense of some $341 billion in economic output;

• Over 155,000 lost jobs, $68 billion in lost wages, and $83.5 billion in reduced tax revenues; and,
• A net fiscal loss of $53.5 billion in tax revenues. Not only would these tax increases destroy jobs and reduce economic activity, but they would also reduce federal tax revenues by $53.5 billion.  While the president is using the current debt talks to garner momentum for this plan, observers should realize that these new taxes would do absolutely nothing to shrink our nation's massive debt.  In fact, it will only make matters worse.

[See a collection of political cartoons about the budget deficit]

There is something that President Obama could do to make American oil and gas companies contribute more tax revenues:  let them get back to work.  Allowing for expanded domestic exploration and production would be a massive stimulus to the U.S. economy that wouldn't cost the government a dime.  Dr. Mason estimates that opening our nation's Outer Continental Shelf would produce an extra 1.2 million jobs, $273 billion in economic activity, and $87.7 billion in tax revenues over the next 30 years.

Raising taxes on the American oil and gas industry may make for good populist rhetoric on the stump, but it makes no economic sense.  If the president is truly interested in reducing our nation's debt and providing well-paying jobs for the American people, he should be praising, not demonizing the American oil and gas industry, which provides jobs for over nine million Americans.

  • Read more about the Deficit and National Debit
  • See 6 ways to raise the debt ceiling
  • See a collection of political cartoons about the economy
  • Thomas J. Pyle is the president of the Institute for Energy Research,  a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets.