The Hill: Taxing Us Toward Energy Insecurity

The following op/ed by Energy Institute President and CEO Karen Harbert appeared in The Hill newspaper.

As members of Congress begin working on a spending plan for next year, they are guided by a budget proposal from the administration that is a classic example of the law of unintended consequences. The administration seeks to fund a significant increase in government spending by imposing more than $80 billion in new taxes and fees on America’s oil and gas industry — which would actually make us more dependent on foreign oil, raise consumer costs, and result in fewer jobs. These provisions should be rejected.

Raising taxes on oil and gas production is hardly a new idea. In 1980, Congress passed a so-called “windfall profits” tax. The results were counterproductive and, in fact, the amount of oil the U.S. imported rose by 13 percent. According to the Congressional Research Service, the tax increase reduced domestic production of oil and gas by as much as 8 percent. The taxes were later repealed in 1988 and viewed as such a failure that Phil Verlenger, who implemented the policy for the Carter administration, recently remarked that a windfall profits tax would be a “terrible idea today.” Yet the results of the administration’s proposal would mirror those from that failed endeavor.

All of the proposed taxes in next year’s budget have one thing in common: They increase the cost of producing oil and natural gas here at home. This creates a natural disincentive for companies to produce more domestic oil and gas resources since they would have to pay higher taxes if they do so. In some cases, it may even inhibit maintaining existing production levels. Absent a significant drop in demand, the most likely way that the resulting supply gap would be met is to import more oil. Today we import about 60 percent of the oil consumed in the United States, and history has proven increased taxes would only serve to increase that percentage.

As many of America’s policy leaders continue to urge “energy independence,” raising taxes and fees on oil and gas would result in the exact opposite effect. If the U.S. becomes more dependent on foreign imports, it also becomes more susceptible to the volatile price swings and potential supply disruption. Bluntly, the objective of increasing America’s energy security is undercut by these proposed new taxes.

Many of our trading partners have lowered corporate tax rates relative to the United States, which has the second highest effective corporate tax rate of all developed countries. Because energy is a critical underpinning for economic growth, the reduced cost to produce energy in these countries when compared to the higher costs of U.S. energy production through new taxes would clearly make the cost of doing business in America higher. These taxes would also shift a competitive advantage to foreign government-owned energy corporations whose operations are subsidized by their parent governments.

More oil and gas taxes also mean higher prices for consumers. Two of the largest uses of natural gas in the United States are for electricity generation and residential consumption. Since some of the tax increase would get passed on to the purchaser, it is likely that utility rates will increase at a time when American families can least afford it. A significant amount of natural gas produced domestically is used as a feedstock for the production of goods like plastics, chemicals and fertilizers.

Increased taxes would also lead to higher prices of goods, the effect of which will permeate the American economy. At the same time, nearly 6 million Americans have jobs tied to the oil and gas industry. Increasing the production costs of oil and gas via new taxes and fees place these jobs in jeopardy as firms of all sizes would look to reduce operating expenses or shift to overseas production opportunities.

Taxes, especially those that target one industry, are a deterrent to economic growth here at home. Rather than taking up failed policies of the past and making it tougher and more expensive for companies to produce American energy, the administration and Congress should support efforts to tap America’s abundant energy resources.

With more natural gas, nuclear, renewables and traditional fossil fuels produced here at home, our national leaders can spur the creation of new American jobs and economic opportunities, as well reduce our dependence on foreign oil and promote an environment that enables U.S. business to be more competitive in the global market. That’s a balanced energy policy everyone can and should support.

Harbert is president and CEO of the Institute for 21st Century Energy at the U.S. Chamber of Commerce