New Taxes on Oil Industry Would Be Like Cooking the Golden Goose

The Obama administration has been relentless in its efforts to harm the oil industry.


Daniel Kish is the senior vice president of policy at the Institute for Energy Research

President Obama and his like-minded congressional colleagues think they’ve found a way to help plug the gaping hole in the federal budget: Impose massive new taxes on the oil industry. While such a money-grab might be good politics, it actually harms jobs and economic health while losing money for the Treasury.

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The administration has been relentless in its efforts to harm the oil industry, from its ongoing de facto moratorium on drilling in the Gulf of Mexico and Alaska, to new restrictions on existing public lands permits, to its two previous budget proposals, which demanded more than $80 billion in new taxes from the industry because of “overproduction” of energy. Ideological zeal has fueled, and apparently blinded, some officials to the disastrous economic impact of this policy course.

The changes in tax provisions proposed by the president, such as removing the foreign tax credit for dual capacity taxpayers, would tilt the playing field in favor of foreign energy producers, putting American oil companies at a distinct competitive disadvantage. Far from bolstering the budget and fostering economic recovery, a tax increase of $5 billion per year would result in a $128 billion loss in government revenues and would reduce domestic oil production by 400,000 barrels per day by 2025, according to a recent study by energy research and consulting firm Wood MacKenzie. [Check out political cartoons on gas prices.]

Considering that the oil and gas industry currently funds the federal government to the tune of nearly $100 million a day in taxes, royalties, and fees, cooking the goose that lays the golden egg would be completely nonsensical. Just between 1998 and 2008, the oil and gas industry paid $1 trillion in total income taxes. On top of tax revenues, the oil and gas industry paid more than $178 billion to Uncle Sam in rent, royalty, and bonus payments between 1982 and 2009, and supports 9.2 million U.S. jobs.

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Besides undermining current efforts to get the U.S. Government’s fiscal house in order, new taxes on energy producers could threaten good paying jobs at a time when the needle on national unemployment seems to be stuck at 9 percent. A new study by Louisiana State University finance professor Joseph Mason concludes that the new tax burden on the industry would trigger 155,000 fresh job losses at the cost of $68 billion in lost wages. [Read more from the new Energy Intelligence blog.]

An important sidebar to this discussion is the notion that energy companies are somehow making “unfair” profits. Actually, the oil and gas industry earned net income of 6 cents on the dollar compared to 8.6 cents for all U.S. manufacturing, according to third quarter 2010 data. Most oil company stock is owned by mutual funds, pension funds, and retirement accounts, owned by millions of middle-class investors. Torpedoing retirement funds will hurt America. The vast bulk of energy profits are reinvested in exploring and developing new sources of energy. Those investments are a large part of America’s economic engine; in 2010 it provided the United States with a $470 billion stimulus in spending, wages, and dividends. It also provides the energy that moves the nation.

Targeting taxes on the energy sector is counterproductive. As a bipartisan group of senators recently reminded the president, “the oil and gas industry is part of the solution. It will increase jobs and generate billions in new revenue to meet the challenges at hand.” If the administration wants to get smart on how to both increase overall tax revenues and restart the economy, it would increase the pace of deepwater permitting in the Gulf of Mexico and Alaska, because currently, their plan is ineffective.

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