Obama, Menendez Push Economically Painful Anti-Energy Bill

The ones who will be injured most by Senator Menendez's proposals are the consumers and the workers involved in delivering the energy they want.

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

At the beckoning of President Obama, Sen. Robert Menendez once again introduced a bill in the Congress to increase taxes on oil and natural gas companies by about $4 billion annually. My colleague at National Taxpayer Union warned just Monday  that, if passed, this measure would not reduce fuel prices, and in fact could add to the burden faced at the pump. Still, supporters hope this maneuver will be seen as a way to make these companies feel some kind of pain in return.

But here’s a problem with those who would fashion themselves as modern day equivalents of Babylonian King Hammurabi and his ancient code of justice. The ones who will be injured most are the consumers and the workers involved in delivering the energy they want.

[See a collection of political cartoons on energy policy.]

Because many of the signs at gas stations are emblazoned with the logos of U.S. oil and natural gas companies like ConocoPhillips, Chevron, and ExxonMobil, Americans associate these companies with high gas prices. This is hardly surprising, but in fact the prices posted at these local distributors are set by the vendors of the stations. These vendors purchase their resources from the larger companies that develop and refine crude oil for commercial use, but have no commitment to resell it for a specific price.

Local distributors mark up their prices based on demand, location, and a number of other factors to arrive at an acceptable (after-tax) profit margin that will keep them in business. As a Tax Foundation analysis concluded when similar tax-hike schemes were making the rounds back in 2010, when measured over a nearly three-decade-long period, tax payments from the oil and natural gas industry exceeded its profits by 40 percent. And now President Obama and Senator Menendez want to increase the government’s take?

[Read the U.S. News debate: Is Obama's Corporate Tax Plan A Good Idea?]

By increasing the costs associated with extracting and refining oil and natural gas, this measure will add to the price at the pump while fattening government coffers. But in the long run, those coffers might not be so corpulent. Louisiana State University Professor Joseph Mason, who also writes for the U.S. News blog Economic Intelligence, made this point in a 2011 study, concluding that the policies Obama and Menendez seek could slow economic activity from oil and natural gas to the point where other government receipts (such as from profit and payroll taxes) suffer. He estimated net long-run losses of $54 billion.

In an effort to encourage domestic manufacturing and job creation—and take the edge off the high rates of the corporate tax system—the Section 199 deduction was introduced and made available in 2005 to qualifying firms throughout the economy. The Menendez bill will eliminate this deduction for only the oil and natural gas industry, even though this is one sector that’s been contributing to a nascent recovery benefiting many people. According to data from the Bureau of Labor Statistics, each petroleum product manufacturing and refining job yields 8.2 additional jobs, the highest multiplier effect of any industry.

[See a collection of political cartoons on the economy.]

Punishing an industry that is creating a large number of jobs in a sluggish economy—while simultaneously boosting the price of fuel—is hardly the path that will lead to a more robust expansion. In fact, Federal Reserve Chairman Ben Bernanke conceded as much at a recent congressional hearing, stating, “Higher energy prices would probably slow growth.”

Additionally, a portion of the Menendez legislation would make it more difficult for these companies to repatriate earnings made abroad. U.S. oil and natural gas firms go to where the resources are, in part because of the slim profit margins and limited access to such resources they face domestically. By amending what’s known as the dual capacity rule, which offers a credit on earnings that were already taxed overseas, the government proposes to double tax any earnings returned for reinvestment in the United States. Other types of companies operating abroad receive this tax treatment, making the Menendez bill the polar opposite of the across-the-board tax simplification this nation needs now. Hammurabi would likely not be amused.

If Menendez and the Obama administration have problems with the current tax structure, why not institute a larger tax reform? Eliminate complex deductions across the board. Cut the billions in annual “green energy” giveaways while at it. Reduce the corporate rate to encourage companies to invest in the United States, and watch as investment pours into the country. Or, we can ignore this strategy and watch America decline—not dissimilar to the way Hammurabi’s realm did after his death.

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