While addressing mortgage debt deemed “toxic” in a desperate effort to rescue the US economy, Congress somehow saw fit to raise toxicity of the political climate for oil and natural gas. The message is chilling: A government willing to launch lifeboats for American business has only torpedoes for the industry that meets 65% of American energy needs. It’s chilling but not, after 2 years of mindless demagoguery on energy, surprising.
After terrorizing equity markets by rejecting on Sept. 29 the $700 billion rescue that Treasury Sec. Henry Paulson proposed for a financial industry suffering from sclerosis, Congress resorted to the political graft with which it has earned itself a place in history for depth of public disapproval. It fattened up the bail-out package, basically the public purchase of housing loans no one else will buy, with giveaways that would look expensive if not hitched to an already mind-numbing federal commitment. When the economic going gets tough, Congress piles on pork. The House passed the historic package on Oct. 1, the Senate on Oct. 3, when President Bush signed it into law.
Vote-buying goodies
One of the vote-buying goodies was an energy bill that got nowhere when introduced last spring. The Energy Improvement and Extension Act of 2008, now enshrined as Division B of the Emergency Economic Stabilization Act, extends and expands tax credits and other subsidies for energy forms preferred by Congress but not markets, such as wind, geothermal, solar, marine renewables, and, of course, biofuels. There’s even a “transportation fringe benefit” for bicycle commuters.
With oil and gas, the measure isn’t so generous. In fact, it’s altogether peevish. It singles out the oil and gas industry for tax increases from which other industries are spared. That this can occur in a bill designed to rescue the American economy is appalling.
The tax hikes aren’t unintended by-products of clumsy wording or organizational complexity. They’re unmistakably deliberate.
One of them denies access to a scheduled tax benefit by companies that produce, refine, process, transport, or distribute crude oil, natural gas, or oil products. The American Jobs Creation Act of 2004 introduced the manufacturer’s tax deduction to help American companies compete internationally after exporters lost a tax break challenged successfully by the European Union. The deduction rate began at 3% of net income in 2005, grew to 6% in 2007, and is scheduled to reach 9% in 2010. For oil and gas companies, the rate now stays at 6%.
Use by oil and gas companies of the manufacturer’s deduction has been subject to crass misrepresentation. Lawmakers have been disparaging “$18 billion in tax breaks for the oil industry,” all but $4 billion of which is the 10-year value to oil and gas companies of the manufacturer’s deduction, which is anything but a break for one industry. Now it’s a benefit worth less to oil and gas companies than to the US companies with which they compete for capital.
Beyond that, the new law reduces the amount of foreign taxes that oil and gas companies can deduct in calculations of US income tax and probably will expose production earnings in some places to double taxation. It also raises the Oil Spill Liability Trust Fund tax from 5¢/bbl to 8¢/bbl through 2016 and 9¢/bbl in the expiration year of 2017.
Hostility
The combined bite of these tax hikes won’t be great—perhaps $8-9 billion over 10 years in an industry in which the largest 27 companies paid $90 billion in income tax alone in 2006. It’s still money that can’t be invested in new production, refining capacity, or other essential elements of future oil and gas supply. Any suggestion that forgone domestic supply contributes to economic health is preposterous.
Worse than the dollar amount is the industry-specific hostility that undergirds the tax hikes. A capricious change in the terms of oil and gas investment is bad enough for a country whose huge energy needs are impossible to satisfy with politically pampered alternatives. But punishing oil and gas in an otherwise palliative law is an unprecedented rebuke.
