The Obama Administration today released its proposed FY 2011 budget. Not surprisingly, it contained $36.5 billion in new taxes over ten years on the oil and gas industries, while heaping new billions in taxpayer support for politically-favored energies. Such policies are never a good idea, but they are particularly destructive in the midst of a severe recession. Levying new taxes on efficient energy, and new subsidies for inefficient energy, is a recipe for higher prices and fewer jobs.

New Taxes on Oil & Gas

The White House budget request claims that, “Oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices.” In the first place, it is odd to hear the White House worrying about high energy prices, and also to hear it deny that tax policy gives incentive for production.

Both of these points flatly contradict the whole philosophy behind the White House’s favored cap-and-trade scheme, which is expressly designed to (a) raise the price of fossil-based energy and (b) reduce the incentives to use such energy sources. The White House can’t have it both ways: Do they want higher energy prices (cap-and-trade) or don’t they? And do they think government policies influence energy production, or don’t they? If they claim tax hikes on the oil and gas industries won’t have any incentive effects on production or jobs, then how can they claim that “green investments” will create jobs in the solar and wind industries?

The White House’s statement also euphemistically labels its tax hikes as ending “subsidies” to the oil and gas industries, but that would only be true if the IRS is considered the rightful owner of every dime earned in America. After all, in 2008 alone, the major energy producers incurred $95.6 billion in total income taxes, of which $23.2 billion went to the U.S. government at all levels (the rest being owed to foreign governments). On top of the straight income taxes, oil and natural gas producers paid an addition $12.5 billion in U.S. production taxes.[i] The oil and natural gas industries are hardly being “propped up” by the taxpayer, in contrast to the solar industry and others that can’t pass the market test. The so-called loopholes and tax subsidies are really just methods of allowing private companies to keep more of the money they earned from providing consumers with low-cost energy.

Explaining the Manufacturing Deduction

The biggest “subsidy” on the chopping block is repeal of the Section 199 manufacturing tax deduction for domestic oil and natural gas companies, which the Office of Management and Budget estimates would raise an additional $17.3 billion in revenue over the next ten years.

It is important to realize that the Section 199 manufacturing deduction was not a “loophole” created exclusively for the benefit of energy companies. On the contrary, it was established as part of the American Jobs Creation Act of 2004 [.pdf], and applied to all domestic manufacturers to spur job creation and stem the outsourcing of manufacturing jobs, which was a sensitive political issue at the time. The Obama Administration is not proposing to repeal the “loophole” in its entirety, but merely to deny it to oil and gas companies, while leaving it in place for every other domestic manufacturer. Apparently in the eyes of the Administration, some domestic jobs are more equal than others.

Regardless of the motivations, the simple fact is that levying new taxes on an industry will reduce the incentives for production, leading to fewer jobs and higher prices for consumers. In the fall of 2008, IER published an analysis of a similar call to end the Sec. 199 deduction for oil and gas companies. Although some of the conditions may have changed in the interim, the results are still sobering. The study projected that the tax hike on oil and natural gas would reduce total household earnings by almost $35 billion over ten years, and reduce total U.S. economic output by $186 billion.

A similar analysis applies to the other tax hikes proposed in the new budget. Raising taxes on efficient industries—ones that are net tax contributors, rather than tax recipients—is no way to create jobs or help consumers. To repeat, if the Administration denies that raising the costs of production will reduce output in these industries, then why would its cherished cap-and-trade program have any effect? Their whole argument is that raising the price of fossil fuels will reduce output in those sectors, and we agree: Politically-imposed cost increases reduce output, raise prices, and destroy jobs in the targeted industries. That’s why we oppose them.

To paraphrase President Ronald Reagan’s view of government programs, the Obama Administration’s view of energy can be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

[i] See EIA’s “Performance Profiles of Major Energy Producers, 2008” [.pdf], Tables T12 and T13 (pages 71-72).