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Media Matters Misses Mark in Criticizing NTU Anti-Energy Tax Campaign


Douglas Kellogg
May 11, 2011

Media Matters recently examined the National Taxpayers Union’s (NTU’s) efforts to oppose tax increases on energy companies (and by extension consumers), contending that “oil subsidies” could be ended so that more money can be spent on alternative energy sources.

The various points Media Matters conglomerates do not paint a clear picture of the tax situation America’s energy companies face. Instead Media Matters focuses on attacking profits, repeating analyses of oil production based on short periods of time, and mischaracterizing the nature tax deductions, all while ignoring the myriad implications of such an unabashed tax assault on a particular sector of the economy.

Right off the bat in Media Matters’ article on what it calls “NTU’s misinformation”, Media Matters is itself repeating misinformation. The very first, and primary, claim is that measures like the Section 199 tax deduction are “taxpayer giveaways”.

The commentary then applies a different standard to the President’s push for spending any new revenue from an increased tax burden on energy companies on “alternative energy.” Somehow, this is no longer a “taxpayer giveaway” but is now an “investment”.

Aside from the fact that the President is transparently trying to put the one part of the energy industry at a disadvantage to reward politically favored friends in the “green” sector, the various tax provisions to which Media Matters refers are clearly not subsidies.

Oddly enough, Media Matters even cites a source (apparently to bolster their argument) who clarifies that we are not talking about subsidies: …John Kingston, Director of News at energy information firm Platts said: ‘…I don't view them as subsidies.’” Clearly, we are not talking about subsidies, we are talking about deductions.

If a self-employed person takes a business trip and deducts airfare from his income tax return, the government never pays him a cent; the same applies here. Energy companies are simply permitted to take deductions for a variety of necessary business activities, along with a policy called “dual capacity” to help offset taxes paid to foreign governments. The United States is the only major industrialized country in the world that “double taxes” the foreign income of American businesses and individuals. NTU would certainly prefer a tax code that is far more simple, a code that would not “double tax” Americans, but that is not the situation we have today. Because international competitors do not face such a disadvantage, provisions like dual capacity are in place to keep America’s companies competitive in the global race for resources.

This is the larger reality Media Matters fails to explain. American firms face intense international competition from state-owned oil companies out of China, Venezuela, and the Middle East. Even with the deductions in question, they face an effective tax rate of around 34-41 percent, and have a relatively low profit margin of 5.7 cents on the dollar.

Not only would ending these tax deductions raise prices at the pump, it could put American jobs in jeopardy, (And yes, Brazil is expanding oil drilling; officials there are not just talking about ethanol.)

These dire consequences do not seem like a worthwhile tradeoff for a vindictive tax increase on an industry the left vilifies.  After all, GE (home of recent Obama Economic Advisory Committee head Jeffrey Immelt) recently received press for paying an effective tax rate far below the U.S. corporate average and President Obama never batted an eye. Of course, even this story has its wrinkles, as our recent study on tax system complexity noted.

Speaking of complexity, it’s one thing to advocate repeal of provisions like Section 199 and dual capacity across the board, in exchange for reductions in corporate tax rates that even the Administration acknowledges to be high. It is also quite legitimate to examine programs for all forms of energy that actually do represent commitments of tax dollars. NTU has criticized federal initiatives such as nuclear energy loan guarantees or the ultra deepwater natural gas and petroleum research program in the past.

Now that we have painted a broader picture of the challenges American energy companies face, and discussed the claim of “taxpayer giveaways”, we can examine Media Matters’ additional arguments point by point.

Media Matters: Energy Experts Say Getting Rid of Oil Subsidies Won’t Cause Jump in Gas Prices

Fact: New taxes on the oil and gas industry increase the cost of developing resources, exerting downward pressure on supply and, in turn, upward pressure on prices at the pump.

As stated previously,  painting legitimate business deductions as “subsidies” that exist far outside the realm of the supply chain and the process of bringing oil and gas to market is erroneous and misleading. But what will the effect be on prices at the pump?

The assumption that levying new taxes on oil and gas production will somehow decrease prices at the pump is patently untrue.

  • According to the Congressional Research Service (CRS), “the proposals also will make oil and natural gas more expensive for U.S. consumers, with the effect of reducing consumption of those fuels.” (“Report: Oil Industry Tax and Deficit Issues,” Congressional Research Service, 7/21/2009)
  • “On the one hand, the tax changes proposed in Table 1 would increase tax collections from the oil and natural gas industries and may have the effect of decreasing exploration, development, and production, while increasing prices and increasing the nation’s foreign oil dependence.” (“Oil Industry Tax Issues in the Fiscal Year 2011 Budget Proposal,” Robert Pirog, Specialist in Energy Economics, CRS, 3/24/2010)
  • Additionally, CRS notes that elimination of these deductions have “made oil and gas products artificially inexpensive, with consumer costs held below the true cost of consumption.” (“Oil Industry Tax Issues in the Fiscal Year 2011 Budget Proposal,” Robert Pirog, Specialist in Energy Economics, 3/24/2010)

Claim: President Obama has not banned oil production in the U.S.

Fact: The availability of domestic resources for leasing and development has plummeted during the Obama years.

Anyone who can drive to a gas station understands that not all production was banned as a result of President Obama’s moratorium (and subsequent “permitorium” on new oil and gas exploration. However, the policies did diminish our potential production, and by reducing supply, contributed to increased prices.

Beginning in 2008, elected officials began taking serious steps aimed at opening additional domestic resources to production – starting with the lifting of the executive moratorium on production in 2007 and 2008, and followed by the bipartisan decision in September 2008 to allow the Congressional moratorium on development to expire.

As of January 2009, the five-year leasing plan in place was poised to significantly increase domestic oil and gas production. But in early 2010, the President revised the plan, taking off the table significant resources that had previously been in the process of opening for development and leasing. In December of 2010, the Administration took it one step further, releasing an even more restrictive leasing plan that locked away the entire Atlantic, entire Pacific, and the Eastern Gulf of Mexico – effectively returning long-term domestic production prospects to where they stood prior to the lifting of both the executive and congressional moratoria in 2008. It’s difficult to call this anything but a “ban” on new development.

  • On January 9, 2007, the Bush Administration lifted an executive moratorium on offshore oil and natural gas drilling in Alaska’s Bristol Bay, which opened 5.6 million acres for energy development. (“Bush Lifts Oil-Drill Ban in Alaska’s Bristol Bay,” Washington Post, 1/10/2007)
  • Then on July 14, 2008, the Bush Administration lifted an executive moratorium on oil and natural gas on the Outer Continental Shelf, aiming to urge the Congress to act toward clearing “the way for exploration along the country’s coastline in response to soaring energy prices”. This also opened the door for the Department of the Interior (DOI) to put a plan in place that would allow lease development to move forward. This executive moratorium was put in place by the Clinton Administration in 1998 and was due to expire in 2012. (“Bush Lifts Drilling Moratorium, Prodding Congress,” The New York Times, 7/14/2008)
  • The expiration of the ban on drilling led to a leasing plan from the Bush White House that began to finally pave the way for significantly increased domestic production. (“The Shifting Offshore Landscape,” The Washington Post, 10/12/2010)
  • In early 2010, Obama released an updated leasing plan that began to lock away large areas that had recently been opened to leasing (upon lifting of the Congressional and executive moratorium, and issuance of President Bush’s five year leasing plan). (“The Shifting Offshore Landscape,” The Washington Post, 10/12/2010)
  • In December 2010, Obama released a much more restrictive plan, locking away the entire Pacific, entire Atlantic, and Western Gulf – essentially returning leasing conditions to where they were before the ban was lifted. (“The Shifting Offshore Landscape,” The Washington Post, December 1, 2010)

Claim: Oil and Gas Production has Increased Under President Obama’s Administration

Fact: Production increases witnessed in 2010 were rooted in previous policy and permitting.

Media Matters echoes President Obama’s claim in March that domestic production had increased in 2009 and 2010.

In reality, the statement is badly flawed. Oil production does not happen in measures of weeks or months or even years. The increase in production cited by the current White House is, in fact, primarily a result of permitting and policy decisions made by the Bush White House. Since companies spend years developing a single well from permit to production, to attribute the current uptick in production to Obama Administration policy is a mistake. Of course, oil prices (especially futures) often react much more quickly to decisions such as these – hence the reasoning behind committing quickly to new exploration, even though the gains will occur over a longer term.

More evidence of this fact? American domestic production is forecasted by the EIA to drop by 240,000 barrels per day (13 percent) in 2011, and an additional 200,000 barrels per day in 2012.

  • “But an uptick in production – such as the one the White House is currently touting in its press materials – cannot be attributed to permits granted yesterday, last week, or even five years ago. Companies spend years developing a well – the process from initial permit to production can take up to eight years. The increased production we're seeing now is mostly due to permits granted before Mr. Obama took office.” (“Time for a Cease-Fire in the War on Oil,” Dr. Joseph Mason, The Wall Street Journal, 4/25/2011)
  • This year, the Energy Information Administration forecasts a 240,000 barrels-per-day drop (13 percent) in the Gulf, and another 200,000 drop next year. The administration blames oil companies for sitting on existing permits. “These are resources that belong to the American people,” Interior Secretary Ken Salazar recently complained, “and they expect those supplies to be developed in a timely and responsible manner and with a fair return to taxpayers.” (“Time for a Cease-Fire in the War on Oil,” Dr. Joseph Mason, The Wall Street Journal, 4/25/2011)

After this thorough examination of Media Matters’ claims and the tax situation facing American energy companies, it is indeed apparent the American people are being misled on this issue – not by the National Taxpayers Union, but from the current Administration and its allies. Should the effort succeed, not only will jobs be lost, energy diversity will be diminished, retirement portfolios of millions of Americans could be endangered and consumer gas prices be at risk.  This may only be the beginning of a long list of tax increases sought by the Administration, all while refusing to enact any meaningful budget reform.


 

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