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Baucus Not Ending Oil Subsidies but Implementing Tax Hikes

Posted By Mike Brownfield On May 4, 2011 @ 5:30 pm In Economics | Comments Disabled

Senator Max Baucus (D–MT) isn’t shy about picking winners and losers.

Last December, he led the charge to keep in place a subsidy of $6 billion per year to the ethanol industry [1]. Now he’s picking the oil and gas industry as losers by proposing to eliminate subsidies for big oil and using the increased revenue to subsidize a different set of political winners. Baucus would provide even more incentives for more fuel efficient vehicles and alternative energy fueling stations.

But what Senator Baucus labels as an oil and gas subsidy is not an oil and gas subsidy. Baucus proposes removing the tax deduction under Internal Revenue Code Section 199 for oil and gas and reducing a tax credit for royalty payments U.S. companies pay to foreign governments. These policies are broadly available and are not specific tax breaks for oil gas producers. Repealing or reducing these tax deductions for the oil and gas industry would be a punitive, targeted tax hike that would likely reduce supplies and increase prices in the years ahead by discouraging investment in domestic production of oil and natural gas.

The domestic manufacturing tax deduction that oil and gas companies receive is a general tax deduction that goes to all domestic manufacturing [2]. Producers of clothing, roads, electricity, water, and many other goods produced in the United States are all eligible for the manufacturer’s 9 percent tax deduction. EA Sports receives the deduction to make the Madden video games. Even Hollywood and The New York Times receive the 9 percent deduction. In fact, Congress already imposed a tax hike for oil and natural gas companies by freezing the deduction at 6 percent for just that industry. Eliminating the tax deduction entirely for oil and gas would clearly be an even larger, industry-specific tax hike. If anything, Congress should make the deduction available to all domestic production activities.

The foreign tax credit is a critical feature of the worldwide tax system that prevent the U.S. corporate income tax from double taxing and thereby further crippling the international competitiveness of U.S. companies. Foreign tax credits are not unique to the oil industry, so the Baucus proposal is just another punitive, targeted tax hike.

Baucus’s proposal would significantly increase taxes paid by U.S. oil and gas companies competing abroad, subjecting more U.S. foreign income to double taxation and severely undermining their ability to compete abroad and grow at home. Instead, Baucus should be advancing the competitiveness of all American companies and workers by proposing to eliminate the U.S. tax on foreign source income.

Sadly, the Montana Senator wants to use taxpayer money to invest in more fuel efficient vehicles and alternative fuel vehicle infrastructure. The press release on the Senate Finance Committee is headlined [3], “Baucus Unveils Plan to End Tax Breaks for Largest Oil and Gas Companies, Invest in Cleaner, Cheaper American Energy.”

This raises the question: If it’s cheaper, why do you need taxpayer money to invest in this energy? With gas prices as high as they are, if these alternate sources of energy need the government’s crutch, there’s a good chance they’re not going to help the American consumer. Economic alternatives to gas-powered vehicles will reach the market when they’re cheaper without government intervention. Such alternatives are not new technologies, nor are they cheaper. Stop trying to force them into the marketplace.

We need oil, and we can ramp up production quickly in areas like the western Gulf of Mexico, where production has dropped nearly one-third of a million barrels [4] since last April. Increasing the supply of oil can help offset rising demand, and it can be a huge boon for the American economy.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/05/04/baucus-not-ending-oil-subsidies-but-implementing-tax-hikes/

URLs in this post:

[1] keep in place a subsidy of $6 billion per year to the ethanol industry: http://thehill.com/blogs/e2-wire/677-e2-wire/131809-e2-morning-roundup-baucus-floats-ethanol-compromise-renewable-power-grant-extensions-plus-big-hurdles-for-offshore-inspectors-bingaman-laments-obamas-drilling-retreat-and-more

[2] all domestic manufacturing: http://taxes.about.com/od/deductionscredits/a/domesticproduct.htm

[3] is headlined: http://finance.senate.gov/newsroom/chairman/release/?id=f3f2f50e-8f94-4b36-9318-6b74466d52a4

[4] dropped nearly one-third of a million barrels: http://naturalresources.house.gov/Issues/Issue/?IssueID=32333

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