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The U.S. cannot afford to tax energy producers more

by Jack Rafuse
Reuters – October 3, 2012

Gasoline prices are at all-time highs. As a result, energy policy concerns echo in boardrooms and family rooms across the U.S. At a recent House Energy Committee hearing on “The American Energy Initiative,” Harold Hamm, the top energy adviser of Republican presidential candidate Mitt Romney, warned that President Obama’s proposed repeal of the energy tax provisions for oil and natural gas producers (including a manufacturing tax deduction that all U.S. manufacturers receive) would decrease drilling activity by 40 percent. Can the U.S. afford that?

President Obama wants to end the right of major U.S.-based oil companies to deduct tax payments they make to foreign governments for their overseas operations. He also wants to end tax credits that are allowed to every oil and gas company. Romney wants to protect American competitiveness by keeping the tax benefits intact for oil companies. Let’s look deeper at the energy industry and the taxes energy companies pay.

According to the American Petroleum Institute, the oil and natural gas industry pays more than $30 billion on average to the federal government in taxes, rents and royalties every year. The industry is taxed at an effective rate of 60 percent – higher than any other domestic industry.

Under President Obama’s plan, the energy industry would pay $10 billion more in U.S. taxes every year than it does now. But his logic – if the industry now pays $30 billion, an additional $10 billion would be good for the federal government – is seriously flawed.

The oil and gas industry is responsible for more than nine million jobs in the United States and contributes 7.7 percent of the country’s GDP. A 2011 study by research and consulting firm Wood Mackenzie found that increased taxes on energy producers will put a burden on the industry, ultimately resulting in fewer jobs, less GDP growth and less government revenue. The implications would likely extend to the economy, the individual and the federal government’s coffers.

A change in energy taxes would hurt Americans in other ways too. The oil and gas companies are not owned by an elite few; in fact, only 2.8 percent of their shares are owned by corporate management. The great majority of energy company shares are retail shares owned by individuals and public employees, such as teachers and firefighters who are invested in mutual funds and pension funds for retirement. Higher taxes would, in the end, hurt the value of these investments.

Higher taxes on energy companies would ultimately hurt the federal government as well. In 2010, oil companies invested more than $470 billion dollars in the U.S. economy – more than half the amount of the 2009 government stimulus.

Raymond James & Associates analyst John Freeman predicts that the United States could become the world’s largest oil producer before the end of the decade, which would contribute greatly to the nation’s energy security. Domestic oil and gas production will decline, rather than grow, if taxes on the producers are increased, potentially reversing this prediction.

U.S oil and gas production declined when the “Excess Profits Tax” was placed on oil and gas companies during the Carter administration. Repealing the energy tax provisions would likely have the same result.

The next administration needs to consider the current economic climate and the opportunities for future energy security. The energy industry will play a critical role in the nation’s economic recovery and our drive for a more secure future. Let’s not trade long-term economic well-being for a futile and shortsighted dream of easy revenues.

Originally published at http://blogs.reuters.com/great-debate/2012/10/03/the-u-s-cannot-afford-to-tax-energy-producers-more/

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