Taxes on Oil Producers Will Hurt, Not Help, With Deficit

Encouraging domestic oil production would grow the economy.

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

By mid-August, Washington, D.C., is a quiet place. Congress is on recess. The bureaucrats are on vacation. The media have headed out to the Cape or the Vineyard for the summer.

Unfortunately, all good things come to an end. Eventually, the president and Congress will make their way back into town chock-full of great "ideas" to spur the economy. Worse, the president and the congressional "super committee" (official title: the Joint Select Committee on Deficit Reduction) will shortly have competing proposals on how best to reduce the deficit.

Before the president and Congress offer up their proposals and we launch into the maelstrom again, it might be worth pointing out a few, very obvious facts to inform the conversation. [Vote now: Who won the debt ceiling standoff?]

First, the economy is in fairly serious trouble. There are now 14 million unemployed Americans (up about 2 million since 2008). The nominal unemployment rate is 9.1 percent (up from 7.8 percent in 2008), and the real unemployment rate is probably closer to 15 percent. Gasoline prices hover around $3.50 a gallon (compared to about $1.79 in January 2009). The federal debt is now almost $15 trillion (up from about $10 billion in 2008). Meanwhile, China’s growth rate is six times ours.

Second, the president and some in Congress, including, unfortunately, several members of the super committee, have called repeatedly (and monotonously) for elimination of certain tax deductions affecting energy companies. Some tax provisions, like Section 199 (the payroll tax credit), are available to all companies (movie studios, Starbucks). Others, like the dual capacity provisions, ensure that American energy companies can compete for energy production projects with foreign companies and foreign governments by making sure they are not taxed twice on the same revenue. Still others, like deductions related to intangible drilling costs, ensure that smaller producers can continue to explore for and produce energy. This is especially important when you consider that it is the smaller producers who have led the development of shale gas that has reduced natural gas prices by 80 percent and set the stage for the coming renaissance of both domestic energy and industries (like steel, chemicals, and fertilizers) that rely on such energy. [See a collection of political cartoons on gas prices.]

Third, eviscerating these tax provisions will provide about $40 billion in additional revenue over a decade. For comparative purposes, the joint committee has been tasked with producing $1.2 trillion in cuts or tax increases. Increasing costs on energy consumers—and make no mistake, changing these provisions will result in increased energy costs borne by consumers—will do next to nothing to close our yawning deficit.

Finally, and most importantly, there is a better way. We can increase employment, reduce gasoline prices, enhance our energy security, and, most important for purposes of our current conversation, generate more tax revenue for the federal government by allowing those who explore for and produce energy to do so in more places here at home.

Right now, less than 3 percent of the entire federal estate is made available for energy exploration and production, despite the fact that the United States has the largest energy resource base in the world. By expanding the amount of federal lands available and cutting red tape, we could reap enormous benefits.

What sort of benefits are we talking about?  A recent study by Prof. Joseph Mason at Louisiana State University noted, 

Encouraging exploration and production in the OCS [Outer Continental Shelf] represents a highly effective means of increasing Federal tax revenues generated by the oil and gas industry while simultaneously stimulating the economy, potentially contributing $73 billion annually in economic activity, $16 billion annually in wages, $11 billion annually in Federal tax revenue, $5 billion annually in state and local tax revenue, and 250,000 jobs in the short run exploration phases of development. Those effects can be expected to be followed by another $275 billion annually in economic activity, $70 billion annually in wages, $55 billion annually in Federal tax revenue, another $14 billion annually in Federal royalty payments, $19 billion annually in state and local tax revenue, and 1.2 million jobs in the long-run production phases of development.

Professor Mason’s study is not an outlier, but rather is one of several coming to essentially the same conclusion.

That conclusion—that growth is a more effective remedy for the economy than tax increases—is direct, intuitive, driven by common sense, practical, and desirable. Rather than spending an inordinate amount of time focused on how much to raise the price of energy to consumers, the president and the joint committee should focus on how best to grow the economy, employ people and keep energy prices as low as possible. In expanding access to federal lands—lands owned by the taxpayers—Congress and the president could accomplish all these goals. [See a collection of political cartoons on the economy.]

The super committee can manage decline or encourage growth. Americans await.