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Fiscal Commission Should Support Increased Energy Production, Not Increased Energy Taxes

Among the many suggestions in the draft report of the National Commission on Fiscal Responsibiity and Reform is a 15 cents-per-gallon increase in the federal gasoline tax. No doubt, this proposed tax hike would raise revenues and make a modest dent in the deficit, but it would do so at the expense of the driving public and would disproportionately burden low-income motorists.

There’s a better way. If raising energy-related revenues is the goal, why not fill federal coffers in a manner that actually reduces the price at the pump? Washington can accomplish this by allowing more oil drilling in an about face from the so-called permitorium.

Background

The federal government controls all offshore areas beyond three miles from the coast, as well as vast expanses of energy-rich western lands. Unfortunately, only a fraction of these areas have been opened to energy leasing, due to legislative and regulatory restrictions.

For example, a 2008 Department of the Interior report notes that only eight percent of the estimated 31 billion barrels of oil beneath federal lands is fully available for leasing, while 30 percent is subject to significant restrictions and 62 percent is entirely off-limits. America’ offshore areas hold even greater potential but are also constrained. No other energy-producing nation on earth has limited itself to this extent.

Even with these restrictions, revenues from new energy leases reached $10 billion dollars in 2008. However, the Obama administration has thus far cracked down on domestic energy leasing, which helps explain why leasing revenues dropped below $1 billion in 2009–and doesn’t look to be much higher in 2010.

The up-front money the highest bidders pay to win these leases for offshore or onshore drilling rights is only the first installment in the payoff to the federal treasury. The energy companies also pay annual rents on each lease, and unless they hit a dry hole they must pay royalties of up to 18.75 percent on every barrel of oil and cubic foot of natural gas produced. Royalty revenues vary with energy prices as well as production levels, but have exceeded $9 billion in several recent years. With more leasing, royalty revenues would go up in the years ahead as new wells come online and start producing oil and natural gas.

Even more significant than the leasing and royalty revenues are the potential tax revenues. Energy company profits are subject to the federal corporate income tax as well as other levies – and the more energy produced the higher the taxable income.

Big Money

Overall, the extra federal revenues from a judicious expansion in domestic energy production could easily reach into the tens of billions annually, quite possibly eclipsing the $25 billion or so from the proposed 15 cent per gallon gasoline tax increase. But contrary to a tax hike, allowing additional supplies of domestic oil to come online would lower gasoline prices, as well as those for natural gas and heating oil.

It would be an understatement to call increased domestic drilling a win-win situation. Compared to the proposed gasoline tax, it would be win-win-win. While raising federal revenues in a way that reduces energy costs, it would deliver yet another benefit no tax increase could provide – job creation. One study estimates a potential gain of 270,000 energy industry jobs from expanded offshore leasing.

Legislative Ways Forward

Bills like the No-Cost Stimulus Act (S. 570 and H.R. 1431), The American Energy Innovation Act (H.R. 2828), the American Energy Act (H.R. 2846), the American Conservation and Clean Energy Independence Act (H.R. 2227), and others seek to reap the multiple benefits from enhanced production of American energy.

All would serve as a good blueprint as the next Congress continues the look for solutions to high deficits, high energy prices and high unemployment. And taxes do not go up for any and all of us.

Now this is a win-win substitution as a piece for the overall puzzle of balanced budgets and smaller government.

2 comments

1 Andrew { 11.17.10 at 10:34 am }

“No doubt, this proposed tax hike would raise revenues and make a modest dent in the deficit”

I’ll raise my doubts. The negative economic impact of people naturally driving less-not just individuals, either, think of the all important shipping (as in packages, not boats) industry! The higher cost of transporting goods and people by car, truck, etc. will surely bleed into reduced economic growth, reducing the income tax base, reducing those revenues. I think this tax would be lucky to break even, much less net revenue in.

If one wants to look at energy as a place where, in policy, we can reduce the deficit, well there is an entire unconstitutional department that could be eliminated. The ethanol mandate is also a good place to start-get rid of that, and all the distorting subsidies on energy. But an energy tax isn’t going to help fix the deficit problem.

2 Kermit { 12.12.10 at 11:19 pm }

What we have failed to effectively see and argue is the effect that additional “energy” capacity will have on petrochemical manufacturing. There is a valid reason why most of the petrochemical capacity is near the coast and primarily in Texas and Louisiana. Natural Gas Liquids have been replacing naphtha as feedstock for olefins crackers (ethylene/propylene production). Of course, quite a bit of it is used as fuel for the furnaces. Then one must consider the dependence on natural gas (methane) as both fuel and feedstock for Ammonia and Methanol manufacturing. High natural gas prices during the late 90′s and early this decade have caused every single Methanol plant to be shuttered and dismantled here in the U.S. Also, a good bit of Ammonia capacity has been removed with some of these facilities having been dismantled and shipped to China for re-erection.

So by limiting drilling which is needed to replace depleting production (over 100 offshore production structures are removed annually), we are also limiting if not crippling our basic petrochemical manufacturing capacity.

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