A funny thing happened during the ongoing debate over raising the debt ceiling. President Obama and Senate Majority Leader Harry Reid have drawn a line in the sand, insisting that raising taxes on American oil and gas companies will somehow reduce the deficit and therefore must be part of the final equation. After all, it is only fair, they insist.
The problem with this argument, of course, is that it won’t do a thing to reduce the deficit. In fact, it will make matters worse.
U.S. oil companies take tax credits and deductions that are available to businesses and industries across the board. This includes deducting taxes they pay abroad so they are not double taxed and put at a disadvantage to foreign-owned oil companies. Overall, the industry has an effective income tax rate of 41 percent compared to the average 26 percent tax bracket for industrial companies.
But if our deficit is so large, why should we care if oil companies are hit with a big, new tax increase?
For starters, the government would lose money on the deal. According to a new study by LSU professor Joseph R. Mason, the government would suffer a long-term net revenue loss of $54 billion if the proposal were enacted. The study also projects $341 billion in lost economic output by the energy industry, resulting in 155,000 job losses. It further calculates $68 billion in lost wages that would have strengthened our economy and $83.5 billion in tax revenues that might otherwise have been directed toward reducing the deficit.
Additionally, singling out the American oil industry with a punitive tax hike would both place it at a disadvantage to foreign competitors and discourage domestic production. The United States today imports just over half of its oil and refined petroleum products. This shortsighted proposal would unnecessarily increase our reliance on foreign oil even further. The inherent instability of some of our foreign oil supply already makes the United States vulnerable to disruptions – this proposal would only make matters worse.
The Energy Information Administration (EIA) recently predicted world oil consumption to grow by 1.6 million barrels a day through 2012 and has called for an increase in global supply. At the same time, because of other administration policies, oil production in the Gulf of Mexico is already projected to decline by 150,000 barrels a day in 2011, and by a further 110,000 barrels a day in 2012. This widening gap between domestic supply and demand means that demand for OPEC oil will increase. The last time I checked, many of the OPEC nations weren’t too fond of the United States.
Long-suffering consumers can expect to dedicate an even larger share of their paychecks to filling their gas tanks as a result of rising foreign crude prices. EIA forecasts the annual retail average for regular gasoline price, which increased from $2.78 per gallon in 2010 to $3.56 per gallon in 2011, will rise to $3.64 per gallon in 2012. Keep in mind, those projections do not factor in a potential new tax on energy producers, as envisioned by President Obama and his like-minded colleagues in Congress.
Love them or hate them, oil and gas companies are essential to the U.S. economy, job creation, energy security, and deficit reduction. The industry supports more than 9 million jobs and adds more than $1 trillion to the U.S. economy each year. If congressional leaders are sincere in their desire to reduce the deficit and help the economy recover, they will carefully weigh the unintended consequences of selectively taxing American energy producers before taking action.
Thomas J. Pyle is the President of the American Energy Alliance.
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