Energy & Entrepreneurs

Higher Energy Taxes? Bad Economics and Bad Politics

by Raymond J. Keating

Does the U.S. really need higher taxes?

The answer is a resounding "Yes!" from the White House and leaders in Congress. ObamaCare, of course, was jammed with increased taxes, including on income, pharmaceuticals, medical devices, health insurance, tanning services, and so on. And at the end of this year, if the President gets his way, taxes will be hiked on personal income, capital gains, and dividends, while reimposing the death tax.

Tax hikes apparently are all the rage - despite the fact that they do damage to and restrain entrepreneurship, business, investment, economic growth and job creation. And all of this during one of the worst economic periods since the Great Depression.

But there's still more. As the Senate moves to consider a Gulf oil spill clean-up bill, changes in the tax law directed at energy producers are being considered. That is, members of Congress are seeking to use the BP oil spill to punish all oil and gas firms, and drain more resources away from the private sector and into the political coffers of government.

In the mix are the following:

• a repeal of the Section 199 deduction, which applies to domestic production activities, only for oil and gas producers;

• reducing the ability of oil and gas companies to get relief from double taxation, that is, restricting the standard ability to offset U.S. income taxes on foreign earnings with foreign taxes paid on those earnings;

• and limiting the ability to write-off intangible drilling costs, which equate to research and development costs in other industries.

These tax increases are ill advised, to say the least. First, tax hikes are never good for the economy, but are especially egregious, again, when being considered and imposed during bad economic times, as is currently the case. Second, increased taxes on domestic investment, production, research and development obviously serve as disincentives for such activity - shifting activity elsewhere. Third, double taxation raises the costs for energy exploration and production. In a very real sense, domestic energy producers would be placed at a disadvantage compared to foreign firms.

These energy tax increases obviously would be negatives for the economy. API reports, for example, that there are 2.1 million U.S. oil and gas workers, along with another 7.1 million employees supported by the industry. Why would policymakers want to place many of those jobs in jeopardy due to counter-productive tax increases?

Perhaps the answer is politics? Well, consider poll results released on July 21 by API covering 10 key states on the issue of higher taxes on the oil and natural gas industry. Interestingly, 64 percent of registered voters in these states opposed such tax increases. Consider the state breakdown:

• 64% opposed in Colorado;

• 60% opposed in Maine;

• 64% opposed in Michigan;

• 65% opposed in Missouri;

• 67% opposed in North Carolina;

• 62% opposed in North Dakota;

• 70% opposed in Ohio;

• 60% opposed in Pennsylvania:

• 59% opposed in Virginia;

• 67% opposed in West Virginia.

The voters get it. But will our elected officials come to understand that increased taxes - including on oil and gas firms - make for bad economics and bad politics?

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.