A funny thing happened during the ongoing debate over raising the debt ceiling. President Obama and Senate Majority Leader Harry Reid have drawn a line in the sand, insisting that raising taxes on American oil and gas companies will somehow reduce the deficit and therefore must be part of the final equation. After all, it is only fair, they insist.
The problem with this argument, of course, is that it won’t do a thing to reduce the deficit. In fact, it will make matters worse.
U.S. oil companies take tax credits and deductions that are available to businesses and industries across the board. This includes deducting taxes they pay abroad so they are not double taxed and put at a disadvantage to foreign-owned oil companies. Overall, the industry has an effective income tax rate of 41 percent compared to the average 26 percent tax bracket for industrial companies.
But if our deficit is so large, why should we care if oil companies are hit with a big, new tax increase?
For starters, the government would lose money on the deal. According to a new study by LSU professor Joseph R. Mason, the government would suffer a long-term net revenue loss of $54 billion if the proposal were enacted. The study also projects $341 billion in lost economic output by the energy industry, resulting in 155,000 job losses. It further calculates $68 billion in lost wages that would have strengthened our economy and $83.5 billion in tax revenues that might otherwise have been directed toward reducing the deficit.
Additionally, singling out the American oil industry with a punitive tax hike would both place it at a disadvantage to foreign competitors and discourage domestic production. The United States today imports just over half of its oil and refined petroleum products. This shortsighted proposal would unnecessarily increase our reliance on foreign oil even further. The inherent instability of some of our foreign oil supply already makes the United States vulnerable to disruptions – this proposal would only make matters worse.
The Energy Information Administration (EIA) recently predicted world oil consumption to grow by 1.6 million barrels a day through 2012 and has called for an increase in global supply. At the same time, because of other administration policies, oil production in the Gulf of Mexico is already projected to decline by 150,000 barrels a day in 2011, and by a further 110,000 barrels a day in 2012. This widening gap between domestic supply and demand means that demand for OPEC oil will increase. The last time I checked, many of the OPEC nations weren’t too fond of the United States.
Long-suffering consumers can expect to dedicate an even larger share of their paychecks to filling their gas tanks as a result of rising foreign crude prices. EIA forecasts the annual retail average for regular gasoline price, which increased from $2.78 per gallon in 2010 to $3.56 per gallon in 2011, will rise to $3.64 per gallon in 2012. Keep in mind, those projections do not factor in a potential new tax on energy producers, as envisioned by President Obama and his like-minded colleagues in Congress.
Love them or hate them, oil and gas companies are essential to the U.S. economy, job creation, energy security, and deficit reduction. The industry supports more than 9 million jobs and adds more than $1 trillion to the U.S. economy each year. If congressional leaders are sincere in their desire to reduce the deficit and help the economy recover, they will carefully weigh the unintended consequences of selectively taxing American energy producers before taking action.
Thomas J. Pyle is the President of the American Energy Alliance
Read more on Newsmax.com: Thomas J. Pyle: Obama-Reid Oil Tax Huge Jobs Killer
The debt-limit debate is heading toward a culmination, with President Obama reduced to pleading for the public to support a tax increase and Speaker John Boehner and Senate Majority Leader Harry Reid releasing competing plans that are the next-to-last realistic options. The question now is whether House Republicans are going to help Mr. Boehner achieve significant progress, or, in the name of the unachievable, hand Mr. Obama a victory.
Mr. Obama recognizes these stakes, threatening yesterday to veto the Boehner plan in a tactical move to block any Democratic support. The White House is afraid that it will pass the House and then become the only debt-ceiling vehicle if Mr. Reid can't get 60 votes for his own proposal in the Senate. This would short-circuit Mr. Obama's plan to blame the GOP for a U.S. credit downgrade, any market turmoil, a possible default, and the lousy economy too.
Under the two-phase Boehner plan, Congress would authorize $1 trillion in new debt in return for $1.2 trillion in budget cuts over the next decade. Most of that will come from caps on domestic discretionary spending over 10 years—the Pentagon and homeland security are exempt—with automatic spending cuts if the caps are breached. While one Congress cannot bind another, the proposal would at least guarantee real reductions in fiscal years 2012 and 2013.
In the second stage, the House and Senate would convene a 12-member joint select committee with a deficit reduction goal of $1.8 trillion by November. The majority and minority of both chambers would each make three assignments, and any plan that secured seven votes or more would get an up-or-down vote in both chambers with no amendments.
The danger for the GOP is that the committee could end up proposing tax increases, since the committee's only remit is the deficit, not the larger fiscal landscape or the size of government. A poorly chosen Republican nominee could defect, and any structural change to entitlements almost certainly can't pass the Senate.
Then again, unless the plan passed, Mr. Obama couldn't request the additional $1.6 trillion debt ceiling increase that he would soon need. The political incentive is for a reasonable package, and many Senate Democrats also don't want to vote for tax increases before 2012.
Strangely, some Republicans and conservative activists are condemning this as a fiscal sellout. Senator Jim DeMint put out a statement raking the Speaker for seeking "a better political debt deal, instead of a debt solution" (emphasis, needless to say, his). The usually sensible Club for Growth and Heritage Action, the political arm of the Heritage Foundation, are scoring a vote for the Boehner plan as negative on similar grounds.
This is the kind of crack political thinking that turned Sharron Angle and Christine O'Donnell into GOP Senate nominees. The reality is that the debt limit will be raised one way or another, and the only issue now is with how much fiscal reform and what political fallout.
If the Boehner plan fails in the House, the advantage shifts to Mr. Reid's Senate plan, which would raise the debt ceiling by $2.4 trillion in one swoop through 2012. That would come without a tax increase but also $2.7 trillion in mostly fake spending cuts like less government "waste, fraud and abuse" and a $1 trillion savings from troop drawdowns in Iraq and Afghanistan that are already built into the baseline. As fiscal reform, this is worse than Mr. Boehner's plan.
If the Reid plan passes the Senate after Mr. Boehner's plan failed in the House, Mr. Boehner would be forced to beseech Nancy Pelosi and the White House to deliver Democratic votes to raise the debt limit. Mr. Obama's price could be the tax increases that the GOP has so far rejected. But who knows what else Mr. Obama would demand, and Congress might rush through, amid a political panic and financial market turmoil as the Treasury closed down government services to meet its debt obligations.
It's true that the Boehner plan doesn't solve the long-term debt problem, but Mr. Obama won't agree to anything that does. The GOP plan also may not prevent a U.S. national credit downgrade, but it has a better chance of doing so than Mr. Reid's. The Boehner plan is the most credible proposal with a chance of becoming law before the 2012 election.
The Speaker has made mistakes in his debt negotiations, not least in trusting that Mr. Obama wants serious fiscal reforms. But thanks to the President's overreaching on taxes, Mr. Boehner now has the GOP positioned in sight of a political and policy victory. If his plan or something close to it becomes law, Democrats will have conceded more spending cuts than they thought possible, and without getting the GOP to raise taxes and without being able to blame Republicans for a debt-limit crackup or economic damage.
If conservatives defeat the Boehner plan, they'll not only undermine their House majority. They'll go far to re-electing Mr. Obama and making the entitlement state that much harder to reform.
Courtesy of The Wall Street Journal.