Why Raising Taxes on the Oil & Gas Industry is a Bad Idea.

10 29, 2012 by Forbes

It is difficult to imagine a more controversial and politically exploited issue than taxes, especially with respect to the oil and natural-gas industry. During the Presidential Debate, Pres. Obama claimed that it would help the economy if the government were to end the energy industry’s “corporate welfare.” What analysts, experts and pundits alike fail to mention, or perhaps understand, is the fact that the energy industry does not receive any special tax treatments at all.

At issue is what is less commonly, but somewhat officially, referred to as the “standard tax provision.” Despite what politicians may say, section 199 of the U.S. Tax Code does not provide a subsidy at all. Rather, it provides a legitimate tax reduction available to nearly every American manufacturer. That’s right, there is no such thing as an oil and gas subsidy.

The standard tax provision was created by Congress as a crucial component of the American Jobs Creation Act. Section 199 of the Act encourages manufacturers to re-invest their capital in domestic operations in order to grow the economy and promote domestic job creation. In other words, Section 199 allows a domestic company to receive a deduction for building facilities within the U.S. designed to produce a product. For example, GM could use the “Domestic Production Activities Provision” to build and operate a new transmission plant here in the U.S. instead of say, Mexico or China. The provision applies evenly to software manufactures, traditional manufacturing activities and yes, even to the movie industry.

A rise in energy taxes – as the White House has proposed – would only place an even higher burden on American families, resulting in less money reinvested in developing American energy, higher prices, and less government revenue. For example, a recent study by Wood Mackenzie found that an increase in taxes on energy producers would also result in fewer jobs and less GDP growth.

Not only is the energy sector investing in America, but they also contribute more money in taxes than their actual profits to fill the American government’s empty coffers. According to Nick Schulz’s recent article in Forbes, ExxonMobil, for example, already pays three dollars in taxes for every one dollar of profit they receive in the United States. The current economic situation of the United States would be much worse, if not for needed government revenue from the energy industry. An outright repeal of this section would be devastating for U.S. companies seeking to stay afloat in a very competitive world market. A targeted repeal of this provision for the oil and gas industry would not actually raise revenue for the government coffers, it would only reduce them as the tax revenue generated through investing far outweighs any actual tax collected. Repeal of this provision would accomplish one thing, it would reduce investment and in turn, reduce the number of taxes paid for companies and the workers employed by them.

The truth is that the industry’s record of domestic investment extends to human capital. Today the oil and gas industry is responsible for more than 9.2 million jobs in the United States and contributes over 7.7 percent of the country’s GDP. A recent study by the US Chamber of Commerce suggests that shale oil and gas development alone has helped create 1.75 million US jobs in the last few years and that domestic energy could add another 2.5 million jobs by 2020 and 3.5 million by 2035. Another study by IHS-CERA shows that shale energy was responsible for $62 billion in federal, state and local tax revenue in 2012.

We would all do well to read Nick Schultz’s recent “Taxation Hero” article in Forbes. Many would be surprised to learn that ExxonMobil already pays three dollars in taxes for every one dollar in profit. Most are also surprised to learn that the U.S. already has the 4th highest corporate tax rate among industrialized nations.

“The report from the US Chamber also suggest that between now and 2035, shale energy could contribute more than $2.5 trillion in tax revenue, with more than half that amount going to state and local governments. Oil and gas producers are also expected to invest more than $5.1 trillion dollars during that same period according to the October 23 study.”

Instead of pointing fingers at companies largely responsible for pulling the nation through the last recession, the debate should focus on what would happen to our economy if we place an even higher burden on this industry and whether our economy is best served by a higher corporate tax rate than is found in France, Germany or the United Kingdom.