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The War on American Energy Production

July 14, 2011 J

In their latest efforts to undercut energy production in America, Senate Democrats have proposed a plan to repeal oil and natural gas “subsidies” that could raise an estimated $45 billion over 10 years. The President has recently said it is time to repeal the tax breaks for the private jet owners and oil companies as if they are receiving some sort of special treatment. Never mind that many of these “subsidies” like the Foreign Tax Credit and Section 199 Domestic Production Activities Deduction are tax breaks that a broad base of manufacturing companies have the opportunity to use. The Foreign Tax Credit allows companies to avoid being double taxed on the income they may earn overseas while the DPA deduction gives all domestic manufactures a 9% deduction on their income to incentivize greater domestic production. The cards are already stacked against the oil and natural gas industry who can only receive a 6% deduction on their income.

All of this comes on the heels of a new report issued by the energy consulting firm Wood Mackenzie which compared the impact of greater energy exploration and development versus $5 billion in higher taxes on the oil and natural gas industry. The study picked five specific regions that are prime areas for development: the Rocky Mountains, ANWR, Eastern Gulf of Mexico and the Atlantic and Pacific Outer Continental Shelf (OCS), and applied the increase in taxes on the income and production levels to measure its full impact.

By following a policy that promotes domestic production, the study found there would be an increase of 4 million barrels of oil equivalent per day (mmboed) by 2025. Revenue to the federal government would increase $194 billion based on royalties and leases by companies. More significantly, it would create 530,000 by 2025.

In the second scenario of higher taxes, the economic consequences are enormous. Potential production would fall by roughly 700,000 mmboed by 2020 and an estimated 2.9 mmboed could be unprofitable and potentially too risky to be developed. For the next five years, the government would take in about $3 billion in additional revenue per year, but would subsequently lose $6 billion in 2020 and $10 billion in 2025. By the same year, a total of $16 billion could be lost from the areas to risky to develop. In just four years, 170,000 jobs would be lost.

The contrasts are vivid. Stifling energy production through higher taxes is not sound economics; it is an attempt to discriminate against an industry simply because of the service they provide. As increasing taxes would raise some revenue in the short run, it would stifle production and eventually lead to a loss of revenue and hundreds of thousands of jobs in the long run. The best way to achieve greater production and greater revenue is to not unfairly single them out in the tax code but rather allow for greater domestic exploration. Oil and natural gas companies should play by the same rules as the many other manufacturing companies who receive the same deductions. This would create hundreds of thousands of new jobs while preserving equal access to specific deductions in the tax code. Class warfare rhetoric isn’t the answer to an anemic economy with 9.2% unemployment.

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