Why Raising Taxes on the Oil and Gas Industry Doesn't Make Sense

Increasing taxes on oil and gas will kill jobs.

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Thomas Pyle is the president of the Institute for Energy Research

On Wednesday, September 8, the Joint Select Committee on Deficit Reduction—or so-called "super committee"—held its inaugural meeting to discuss ways to curb federal spending and reduce the national deficit. At the meeting, each of the committee's 12 members gave opening statements pledging to work toward the common goal of coming up with at least $1.5 trillion in savings over a 10-year period, but ideological disagreements on where those savings should come from were apparent. Senator Patty Murray, the Committee's co-chair, said the following: "There is broad understanding among us that economic growth and job creation are the best ways to reduce the deficit and debt—though we certainly have some real differences regarding how to achieve that." 

"Differences" is a nice euphemism for "radically different approaches."  While panel member Rep. Fred Upton called for "the kind of revenue you generate not with tax increases, but by harnessing our nation's great resources," fellow panel member Rep. Xavier Becerra insisted that "the individuals and groups who received the most benefits should be willing and ready to ante up to meet their patriotic duty, to contribute revenue."  Becerra's statement was clearly in reference to the oil and gas industry, which has become the primary target of those who believe that raising taxes on a productive industry is the best way to increase revenue. Although similar proposals have failed to gain passage in Congress, the super committee has indicated that everything is on the table—including tax increases.

[See a collection of political cartoons on the budget and deficit.]

Further complicating matters is the president's jobs plan—unveiled September 6—which also recommends that a portion of the $447 billion price tag come from eliminating tax deductions for only the oil and gas industry. We know President Obama is a lawyer and not a mathematician, so we will cut him some slack, but the repeal cannot count towards both the committee's cuts and serve as offsets for his jobs bill.

The wisdom of raising taxes on an industry that has been one of the sole bright spots in a down economy and that has the potential to create 1.4 million additional jobs is questionable, if you're coming from a purely economic standpoint. North Dakota—which is home to the giant Bakken Shale Oil Formation—has the nation's lowest unemployment rate at 3.3 percent, according to the latest Bureau of Labor Statistics data, and the average wage in the state's oil and gas extraction industry is more than $90,000.

Furthermore, the one-time benefit of repealing a tax deduction for oil and gas while leaving it in place for all other manufacturing industries won't exceed the costs by a long shot. According to a study by Louisiana State University Professor Joseph Mason, revisions to the Section 199 and Dual Capacity tax provisions would raise approximately $30 billion over 10 years, while resulting in a loss of $83.5 billion in reduced tax revenues. Worse yet, the study finds that targeting the oil and gas industry would cost the economy $341 billion in economic output and 155,000 jobs. A study by energy consulting firm Wood Mackenzie echoes these concerns, estimating a loss of 170,000 direct and indirect jobs by 2014 and 700,000 barrels per day in reduced domestic production.

[Read: Obama's Green Jobs Agenda Already Proven to be Ineffective]

That can't bode well for a nation suffering from high energy costs and high unemployment.

Adding insult to injury, proponents of the discriminatory deduction repeal also argue that the industry is only being made to contribute its fair share, but apparently haven't thought to have a look at the industry's recent earnings reports. Reports for the first quarter of 2011 show that oil and gas industry earned 8.2 cents of net income per dollar of sales, compared with 19.4 cents for pharmaceuticals, 17.9 cents for beverage and tobacco products, and 9.2 cents on average for all other manufacturing industries.

On the taxation side of things, contrary to popular reports that oil and gas receives preferential tax treatment, the industry pays an effective rate of 41 percent while the average tax bracket for industrial companies is 26 percent. And yet, some would take away the deduction they receive for producing goods in America. That's right—Section 199 is intended to incentivize the domestic production of goods by offering a deduction to manufacturers in the United States, but we want to repeal it for those who contribute both jobs and much-needed energy resources.

When will the president and Congress learn that the best way to create jobs and economic growth is to get out of the way?

  • See a collection of political cartoons on the economy.
  • Read the U.S. News debate: Should offshore drilling be expanded?
  • See the 10 priciest years in history for gas.