Blame Taxes, not "Big Oil"

Andrew Moylan

5/19/2011 2:20:00 PM - Andrew Moylan
Politics often mimics theater. And – displaying elements of drama, intrigue, and a fair bit of fantasy – this month's elaborate production by Senate Democrats to frame oil companies as the reason for high gas prices merits a Tony nomination.

Beyond entertainment, the push to single out U.S. oil and gas firms for additional tax burdens holds little value.

In fact, if the Senate were to pass the kind of proposal it voted on this week, the Congressional Research Service warns that American consumers would face higher energy costs and greater reliance on imports. Echoing that concern, S&P notes the public will ultimately pay the price in limited supplies and rising prices for lawmakers playing politics with energy policy.

Washington’s debate over so-called oil "subsidies" signifies a fundamental misunderstanding about who pays taxes in America. University of Michigan economist Mark Perry emphasizes that real people, not corporations, ultimately pay taxes. Higher taxes on any industry – particularly a sector such as energy which feeds into every aspect of our economy – translate to higher prices for consumers, lower wages and fewer jobs for employees, and/or lower returns for shareholders.

These realities hardly qualify as common knowledge. And because taxes are a very complex issue, special interest groups can easily exploit public confusion. The liberal-leaning Center for American Progress, for example, tries to paint major oil companies' tax burden as "lower than the average American’s." Yet, federal data shows that’s just not the case.

A 2008 report by the U.S. Energy Information Agency shows the 27 major energy producing companies surveyed bear an effective tax rate of 40 percent – a whopping 14 percentage points more than the average rate of all U.S. manufacturers. The American Petroleum Institute reports that for 2010, oil and gas companies paid effective income taxes of more than 41 percent.

Though activists highlight high overall profits in their screeds, the oil sector's net profit margins after accounting for expenses are actually rather ordinary. The integrated oil and gas industry averages a profit of 6.2 cents per dollar of sales, putting it squarely in the middle of all other industries based on profitability, and lower even than the steel industry which just a few years back convinced President Bush to implement harmful import tariffs to protect them from competition.

Even the basic rhetoric deployed by President Obama and his allies in Congress is misleading. Contrary to the soundbytes, the broadly available tax provisions under attack in the Senate bill are not special "subsidies" from taxpayers because they don’t account for a single cent in federal spending. What’s more, their removal would likely not help to reduce our national debt since Democrats have expressed their hope to use the money raised from these tax hikes to subsidize unproven "green" technologies.

One such "subsidy" is actually a credit known as Section 199 and applies to all domestic producers -- from music producers to soft drink manufacturers. Note that the Finance Committee has yet to call Sony or Coca-Cola to testify on the massive "subisidies" they’re receiving through perfectly legitimate tax credits.

Another target is the "dual capacity" protection, which prevents American firms from being taxed twice on income earned abroad. If the IRS were to double tax U.S. multinationals, they would be put at an enormous competitive disadvantage. Even after these deductions, U.S. oil and gas firms contribute billions each year to local, state, and federal coffers.

Oil companies may make for a convenient scapegoat, but the bottom line is that increasing taxes on American energy is a recipe for higher prices, reduced supplies, fewer jobs and questionable impact on reducing our national debt.

Andrew Moylan is the vice president of Government Affairs for the National Taxpayers Union.