Taxing successful energy sources and subsidizing unsuccessful
ones: That is the essence of Washington's energy policy mistakes
during the 1970s and early 1980s. These mistakes are about to be
repeated in the Renewable Energy and Energy Conservation Tax Act of
2008, recently introduced in the House. This bill would effectively
raise taxes on the oil and natural gas sector and spend much of the
revenue on alternative energy sources like wind, solar, and
biofuels. As it did decades ago, this approach would likely
backfire and raise prices for consumers while reducing energy
security. Congress should craft a new energy policy that relies on
the market to meet the nation's energy needs.
The Tax Code: The Wrong Weapon in the Energy
Battle
The bill proposes a number of changes in the tax code, the
effect of which would be to raise taxes paid by companies working
to expand domestic oil and natural gas supplies. This includes
measures eliminating or reducing some existing deductions against
income from energy production, most notably the manufacturer's
deduction under the American Jobs Creation Act of 2004. Under the
current proposal, this deduction against income, which applies to
domestic industries, would exclude major oil companies producing
oil and gas in the U.S. and would be reduced for smaller companies.
The total tax increase is estimated by the Joint Committee on
Taxation to be $13.5 billion over ten years. Other tax increases in
the bill would bring the total raised to $18 billion.
The push for this bill has been sparked in part by anger over
recent announcements of record profits by ExxonMobil and other
major oil companies. The suggestion that the domestic oil and gas
sector is currently undertaxed may be a popular sound byte, but it
is not supported by the evidence. By many measures, energy
companies face tax rates comparable to, or higher than, those of
other industrial sectors. For example, the average effective tax
rate for major integrated oil and natural gas companies is actually
higher then the average rate of 32.3 percent for the market as a
whole, according to the Tax Foundation.[1]
Also, record profits for oil companies have been accompanied by
record tax bills. According to the Energy Information
Administration, gross revenues from the 27 biggest energy companies
hit a record high of $220 billion in 2006 (the most recent
information available), well above the $188 billion in 2005 and
$129 billion in 2004.[2] But total income taxes also rose to a
record high of $81 billion in 2006, compared to $67 billion in 2005
and $45 billion in 2004. This effective tax rate of 37 percent in
2006 is in line with (and actually a bit higher than) large
corporations in general.
The push for this bill has also been sparked by consumer anger
over high gasoline prices. However, the tax code has nothing to do
with recent increases in energy prices, so tinkering with tax laws
would not benefit the driving public. In fact, consumers would
actually be hurt over the long term.
These tax increases would likely reduce supplies and increase
prices in the years ahead by discouraging investment in new
domestic drilling for oil and natural gas. America's demand for
energy is growing along with its economy, and more domestic oil and
natural gas supplies will be needed in the years ahead. However,
raising taxes on energy would move America in the opposite
direction because it would raise the cost of capital for
exploration and production, making some domestic energy projects
less viable.
These provisions also undercut the energy security rationale
behind the bill. The tax crackdown on domestic oil producers
confers an additional comparative advantage on OPEC and other
non-U.S. suppliers whose imports are not subject to most of these
provisions.
The bottom line is that these tax measures would reduce domestic
supplies of oil and gas. Increased imports, rather than increased
alternatives, would fill the void. And, assuming that demand
continues to grow, these provisions would increase prices for
consumers.
This is the lesson of the infamous windfall profit tax (WPT) on
oil firms imposed under the Carter Administration in 1980 and
repealed under the Reagan Administration in 1988. Then, as now,
anger at "big oil" over high prices led to calls for a punitive
tax. But according to the Congressional Research Service, "The WPT
reduced domestic oil production from between 3 and 6 percent, and
increased oil imports from between 8 and 16 percent. This made the
U.S. more dependent upon imported oil." The tax hikes in the
current bill have different names and operate somewhat differently,
but the end result would be the same.
Another way of thinking about tax increases is that no matter
where a product is taxed, whether at the retail level or further
upstream at the producer level, the additional burden will raise
the cost of that product. Congress has been politically wise enough
not to raise the federal gas tax, especially at a time of nearly
$3.00 per gallon prices, but a tax hike on the producers of oil
would filter down to drivers in the form of higher gas prices. This
is the exact opposite of what the American people want.
Subsidizing Unsuccessful Energy Sources
Much of the extra revenue generated from these taxes would go
toward subsidizing politically correct alternative energy sources
such as wind and solar power. However, the 30-plus-year history of
federal attempts to encourage such alternatives includes numerous
failures and few, if any, successes. Indeed, many of the recipients
of tax breaks and incentives in the bill have been subsidized for
decades-ethanol since 1978, for example-originally with the promise
that they would become viable within a few years and then go off
the dole and compete in the marketplace. But this has never
happened. Instead, Congress just passed a huge expansion of the
ethanol mandate, essentially forcing Americans to use more of it
even as it continues to be heavily subsidized. Wind and solar are
doing no better.
Even after decades of special tax breaks, alternative energy
still provides only a small fraction of America's energy needs. For
example, wind and solar energy account for less than 3 percent of
America's electricity because of their high costs and
unreliability.[3] Further, the overall percentage of
electricity attributable to renewable sources is not expected to
increase by 2030, according to the Energy Information
Administration.[4]
After all these years, Washington has failed to grasp the
serious economic and technological shortcomings of these
technologies, which is why they needed special treatment in the
first place. Federal efforts to pick winners and losers among
energy sources-and to lavish mandates and subsidies on the
perceived winners-have a dismal track record relative to allowing
market forces to decide the direction of energy innovation.
Conclusion
This bill boosts taxes on the energy sources America relies
upon-oil and natural gas-in order to subsidize alternatives with a
spotty track record. Raising taxes on what works and heaping
subsidies on what doesn't: This policy has failed in the past and
would not fare any better this time around. Congress should go back
to the drawing board and craft a policy that places greater
emphasis on the market.
Ben Lieberman is
Senior Policy Analyst in Energy and the Environment in the Thomas
A. Roe Institute for Economic Policy Studies at The Heritage
Foundation.