Opinion

The Great Debate

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

By Jack Rafuse
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.

Comments
19 comments so far | RSS Comments RSS

You and most other Republicans just don’t get… the expectation of more greed will not stop the Koch brothers from seeking more regardless of the taxes. It’s always the same old card game with you guys…trickle down economics.

Posted by CMEBARK | Report as abusive
 

“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 either hasn’t read,, or disagrees with the “Cohan rule”. Foreign tax payment (and even bribes) are an inseparable “business expense” when operating in some countries or dealing with the power elite within them.

The thing liberals don’t seem to understand is that NO business actually PAYS tax. If a company is to “stay in business”, it’s CUSTOMERS must pay enough for products or services offered in the marketplace to pay for necessary property taxes on administrative and production real estate, raw materials, fabrication, storage, packaging, distribution, and sales.

There are an infinite number of “walnut shells” among which business expenses may be hidden. But unavoidable business expenses must still be timely paid, each and every one,, if that business is to survive. If management in enterprise were not smarter and quicker than government bureaucrats, our extraordinary American economy would long ago have been ground into the dust by the socialists and tree huggers among us.

Just remember that you can create any type of society you want just by what you tax and how. If you want less gas, oil and related economic activity, raise taxes on it. If you want more poor, uneducated, unskilled people in your work force, pay them by the head to sit home and breed.

Oh, I forgot. We already do that. Why don’t “we, the people” ask WHY?

Posted by OneOfTheSheep | Report as abusive
 

“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.”

By what nonsensical standard do you lump rents and royalties in with taxes? If an oil company leased drilling rights from another private entity that would be regarded as a market transaction, not a ‘tax’ by one corporation on another… those are operating costs, not taxes.

In the final analysis, there is no rationale for providing a huge government subsidy (in the form of a tax credit) to an already highly profitable and environmentally damaging business. (Other than providing them extra profits, a fraction of which can then be used to purchase friendly op-eds).

[Also, if you're so concerned with the retirement of the schoolteachers and firefighters of America, artificially inflating the price of oil stocks by maintaining a government subsidy is possibly the least imaginably efficient way to help them. You'd be much better off taking the 10B and distributing it to them directly, rather than using it to pump up stocks that they hold a tiny fraction of, and watching the lion's share of the profit go to big banks and other wealthy investors while a trickle gets through to the folks you claim to be concerned about].

Posted by IAmKam | Report as abusive
 

Rents and royalties are not taxes. In order to be able to drill on private land, energy companies must pay the landowner for the privilege. If they wish to do the same on public land, they must pay the landowner be that the state or federal government. The energy companies are not being taxed at a 60% effective rate.

Posted by majkmushrm | Report as abusive
 

The overall picture is simple: Raise Taxes=Raise prices. Corporations never pay taxes, Their customers do. If we could be sure that it would only raise prices I would support cutting tax breaks for ALL Fossil Fuel energy producers. There is a strong possibility that increased US tax burden will cut US production. Us production is key to balance of trade. We can’t import 8.1 Million barrels a day and keep our currency from loosing it’s value. Each barrel at $100 is $810 Million dollars a day leaving out country.

Posted by DennisVictor223 | Report as abusive
 

No matter what, it seems, the oil industry calls the shots. It’s an interesting prospect that we should get scared of rising prices, when the American oil companies sell so much of their l overseas where they can get a better price. It’s been reported that we have an excess above full reserves, which you would think would lower oil prices. Yet there has been no appreciable drop in prices. Instead of crying foul at the government, we should be directing iour anger at the oil companies. Tax them! Let the market (shareholders) go elsewhere when they don’t get the returns they dream of, let the oil companies live with that for awhile. There’s always a tipping point for the balance of power, and that’s when we’ll get serious about viable alternatives. But we’ve never been so brave, rather, we go for convenience. We’d never be so crazy as to buy all our groceries from a seven-eleven, why should we be that way with petrol?

Posted by BuffaloGirl | Report as abusive
 

Energy companies like Exxon Mobil are at the front of alternative energy. They know what stage they are in and they can run the numbers for when they become economically viable. It is the reality of a dragging economy with high energy costs that keep us from recovering fully. As for exports GOOD. We can’t use a large proportion of the refined oil products because they don’t match the required formula set by the EPA. The alternative is to waste those fractions because they can’t be sold in the US. Just decreasing the massive trade imbalance would be a positive thing.

Posted by DennisVictor223 | Report as abusive
 

@DennisVictor223
“Us production is key to balance of trade. We can’t import 8.1 Million barrels a day and keep our currency from loosing it’s value.”

So you think the route to keeping our currency from losing its value is to have the government borrow money to hand to private industry? The way to fix the balance of trade is to fix the deficit (public and private)- there’s an identity relationship between a nation’s external borrowing and its trade imbalance. The way to *not* fix the deficit is to borrow more money and put it in the pockets of the already-wealthy.

Posted by IAmKam | Report as abusive
 

DennisVictor223,

It does not inspire any confidence to hear that Exxon Mobile and the like are at the forefront of alternative energy. It means that they can manipulate its accessibility just like petroleum products. It’s more a token gesture than genuine effort to find solutions. I also don’t buy that they have to sell oil overseas because they don’t match EPA standards. It’s convenience once again. If they invested in the technology to use “waste” efficiently, there would be more domestic jobs, and lower grade petrol pollution around the world. Big and small alike chose to do what will make them an easy buck, not what is socially, ecologically and morally responsible. Our economy would fair much better if the oil industry lowered their prices and sold more. What’s the likelihood of that happening?

Posted by BuffaloGirl | Report as abusive
 

My previous comment should have read: There would be less low grade petroleum products pollution.

Posted by BuffaloGirl | Report as abusive
 

See : http://www.americanprogress.org/issues/g reen/news/2012/02/07/11145/big-oils-bann er-year/. So much money they made is now used to buy back their shares.
Here are some more highlights from the big five’s activities in 2011:
They produced 4 percent less oil and “oil equivalent” in 2011 compared to 2010.
They spent a total of $38 billion, or 28 percent, of their profits to repurchase their own stock.
They are sitting on more than $58 billion in cash reserves as of the end of 2011.
They spent $1.6 million on campaign contributions and $65.7 million on lobbying efforts.
For every $1 spent on lobbying in Washington, the big five received $30 worth of tax breaks.

There are many great articles that shed more light on the oil industry and more.

Posted by BuffaloGirl | Report as abusive
 

Did Jack Rafuse actually make a case for corporate subsidies to profitable companies with a balance of trade argument? Well in addition to @IAmKam’s well articulated response, I’d like to add the following argument in terms of our ability to pay the debt back. Let’s see if there are any takers.

When determining the government’s ability to repay borrowed money for welfare programs (be they corporate or social), we need to also look at the tax dollars generated from the subsidy. For a counter point, let’s look at social welfare in the form of federal subsidies for teacher wages.

The first return on investment is in income tax on money earned. Income tax from these middle income workers is typically higher than corporate income tax and is certainly more than Mitt Romney’s rate. So we’re one up there. Next lets look at where those subsidized wages are spent: Rent, food, and entertainment are typically spent locally where they contribute to the profits of local business owners and wages of local employees. This creates jobs and more income tax. Compare that to investments in oil wells requiring more subsidies.

Oh, I know I’m leading down a slippery slope with this talk. With this kind of thinking there might be more jobs and less corporate profit in the future. And as Jack Refuse warns, that could lead to less domestic oil produced. But if people don’t have jobs, who is going to buy the oil? The answer is: only rich people who get subsidies.

Posted by LEEDAP | Report as abusive
 

Mr. Rafuse, your conflict of interest between the incidence of contingent tax liabilities and achieving an equitable tax burden throughout our society vs. your professional consultancy role to Energy producers is to be expected, however your bias has clouded your perception & rational thought processes. I’ll accept your numbers about jobs and annual tax payments, (est.)… However, there is always – ‘The Rest of the Story. That’s particularly true when someone, like you also has a financial conflict of interest, conforming ideological beliefs then publicly asserts that Energy producers, members of the most profitable industrial sector worldwide, deserve preferential tax code treatment because they already pay billions in various taxes and provide many jobs. Sir, the absurdity of your statements is only exceeded by combining flawed logic, ignoring stakeholders, the magnitude of explored issues, jumping to erroneous conclusions, and developing a flawed plan without a possibility of successful implementation; in other words – FAIL.
First and foremost, every poll I seen in the last six months show a constantly increasing majority of Americans believe corporations and the richest 1 percent aren’t paying their ‘fair share’ of the tax burden and s/b taxed more; the last one showed that 77 percent of respondents strongly agreed or agreed with that statement. Energy producers have received preferential tax treatment for decades and longer from a grateful Congress by creating some really weird loopholes, credits, exclusions, offsets and current tax rates are historically low. Your Op-Ed implies ‘they’ are entitled to those loopholes and preferred treatment, being somehow owed or deserve them; NOT! FACT: BP, Chevron, ConocoPhillips, Exxon Mobil and Shell combined, reported earnings of Three hundred & seventy-five, ($375,000,000.00) million dollars, in Profits, A DAY in 2011and only a few million dollars less, of daily profits, for the 1st quarters of 2012. Frankly Jack, The US government MUST reform the Tax Code to eliminate ALL of their preferential tax loopholes, especially those included in Bush’s 2001 & 2003 tax cuts for the ‘Energy industrial Sector’, Big Oil, and Coal, resulting in ‘them’ becoming the most profitable Corporations in the US. In 2011, the GOP leadership in the House refused to bring, The End Big Oil Tax Subsidies Act of 2011 that cuts nearly $40 billion, dollars of taxpayer subsidies to the oil industry, ending rewards for environmentally dirty practices and restoring some balance to the federal budget, to the house floor for a vote. Ignoring evidence that Bureau of Interior staffers in Denver, Co had developed a culture of drug abuse, office sex, and accepting monetary bribes from Energy Producers employees to falsify government documents to reduce public land leasing fees, oil extraction charges and production taxes owed the government Congress refused to even consider updating the 1872 General Mining Act that authorizes, governs and sets lease and extraction fees on public lands to private miners and corporations; leaving unchanged public land lease fees, extraction charges and taxes owed government established 140 years ago – yet another government subsidy to Energy producers. In 2011, Congress attempted to defund the EPA; the agency responsible for enforcing environmental laws that Big Oil and Coal routinely ignore, break or evade, inspect, levy fines or prosecute violators thereby giving Energy Producers an indirect subsidy, paid for by all Americans. In 2011 Congress didn’t eliminate or revise the corporate foreign earned income provision in the tax code that allows them to offset US tax liability on earned income by taxes paid to a foreign country, yet doesn’t require corporations to pay US income taxes on all earned revenue – another government subsidy to Energy producers. However, in 2011 the GOP Congress did consider revising the Safe Drinking Water Act and granting Big Oil an exemption from the Act for their hydraulic fracturing and oil extraction; a technique involving injecting live steam with a variety of toxic chemicals into the ground to fracture underground shale and extract natural gas. These toxic chemicals were proved to enter an area’s underground drinking water supply in rural OH and are also suspected to be a cause of current tectonic instability in several states previously considered stable. That bill, H.R. 1084 would require the contents of fracking fluids to be publicly disclosed as needed to protect the public health, just as with other toxic discharges, languished in Committee.
IMHO Jack, since the activist Conservative ‘Justices, on the Supreme Court, somehow decided that corporations are citizens [Citizens United vs. FEC] and therefore they could make political campaign donations, and they started making them by the millions, unbeknownst to shareholders, corporations should be taxed under the same tax code provisions as other citizens are, under the same exemption limits and constraints and ALL corporate earned income be subject to US income taxation; REGARDLESS OF WHERE IT WAS EARNED, likewise corporations must disclose all foreign bank accounts and deposits and face the same currency transfer rules, regulations and comply with idiotic TSA policies like all other US citizens.

Posted by JBltn | Report as abusive
 

Okay, that sounded good when I wrote it, but it won’t be ONLY rich people who get subsidies.

However, just as weak is Jack Refuse’s argument that without subsidies domestic oil production will diminish. I do admit that domestic oil production costs are probably a lot more expensive than imported oil production costs. But if that were the only factor, someone needs to explain to me the economics of deep water drilling because that’s a lot more expensive than shale or tar sands. So excuse me for not taking the bait. In this age, where are you going to find better returns on your investment?

Posted by LEEDAP | Report as abusive
 

60%? That statistic looks dubious at best.

Posted by SchWI | Report as abusive
 

Good comments from those who well know that this article is ridiculous. We should tax them more and tax all the wealthy more. Where is the patriotism to the U.S. Government that has been so generous to these very entities. Of course they should pay more taxes and it is time for more reasonable people in Congress who support taxing them more for the good of the country.

Posted by Vilavicki | Report as abusive
 

Nice unbiased article from a person who has no special interest or ties to the energy indusrty..ahem. Why did Reuters publish this article? What did they expect him to say? There are no new revelations here. Summary: Those nice energy companies will go right out and do the right thing if only we’d eliminate their taxes. Dream on.

Posted by possibilianP | Report as abusive
 

The Republican House obviously conducted that hearing on behalf of their friends in the oil business and on behalf of the Republican candidates who are running for office in this election cycle.

On what does their energy stooge, Harold Hamm, base his prediction of a 40% decline in drilling in the event that his energy-producing friends are no longer allowed to reach into the taxpayers’ coffers with both hands.

If they can’t make money in the oil business without taxpayer subsidies, then let the markets find someone who can.

Posted by breezinthru | Report as abusive
 

Some interesting numbers for Mr. Rafuse and others to contemplate. I’ve been meaning to come up with these for awhile but this article gave me a good excuse. First a disclaimer, I caught myself making a couple of rather egregious errors (mixing up millions and billions and whatnot) while calculating these numbers so I may have easily missed others. If anyone can find any errors in these calculations I’d be very grateful. According to the article the US collects US$30B in total average annual revenue from oil and nat gas concerns. According to the US EIA total oil production in the US was 2,065M bbls last year and total nat gas production was 28,576 BCF. Converting to bbl oil equivalent (BOE) gives 7,373M boe total production. This works out to government revenues of US$4.07/boe, not very impressive with oil at ~$100/bbl. So here’s the interesting part. According to the same source (US EIA) Norway produced 754M bbl of oil in 2009 and 3,663 BCF of nat gas for a total of 1,435B boe. In 2009 the surplus income from oil and natural gas production deposited in the Government Pension Fund of Norway was (rather coincidentally) US$29.6B for an equivalent revenue of US$20.60/boe. Can it possibly be true that the Norwegian state receives over five times the revenue per barrel of oil equivalent as does the US government? If both this and Mr. Rafuse’s claims are true shouldn’t the world have already ended? Or, at very least, oil producers be flocking in droves out of the North Sea?

Posted by jtfane | Report as abusive
 

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