By Thomas A. Hemphill and Mark J. Perry Thursday, March 8, 2012
Filed under: Economic Policy
The oil and natural gas industry, one of the strongest job-creating sectors of the U.S. economy, has been unfavorably targeted by President Obama’s proposed 2013 fiscal year (FY) federal budget. To start with, Obama is proposing, for the fourth consecutive year, to repeal Section 199 of the “American Jobs Creation Act.” If enacted, this selectively punitive treatment would increase taxes on oil and natural gas companies by almost $12 billion over the next decade. It could possibly jeopardize some of the millions of American jobs supported by oil and natural gas producers and prolong the sub-par “jobless recovery.”
The Section 199 tax deduction is currently available to all U.S. manufacturers on their qualifying income from domestic production at a rate of 9 percent—all but the oil and natural gas industry, which is already unfairly penalized by previous legislation with only a 6 percent deduction.
Furthermore, the Obama budget additionally targets oil and natural gas companies for higher taxes by proposing to repeal: a) the expensing of intangible drilling costs, b) “last-in, first- out” (LIFO) accounting in favor of the higher-taxed “first-in, first-out” accounting methodology, c) the deduction for tertiary injectants (fluids, gases, and chemicals) that are used in unconventional drilling, and d) the percentage depletion allowance to recover costs for capital investments. Additional tax increases on the oil and natural gas industry would come from proposed modifications of the dual capacity rule (a U.S. tax policy that prevents the double taxation of foreign earnings), increasing the amortization period for exploration costs, and reinstating Superfund taxes.
Taken together, it is estimated by the American Petroleum Institute that all eight targeted proposals of the administration’s FY2013 budget would burden the oil and gas industry with almost $86 billion in higher taxes over the next ten years. Energy companies, who have recently been aggressively expanding operations in domestic oil and natural gas fields from North Dakota to Texas to Pennsylvania, will have an incentive to shift their operations overseas if U.S. tax policies make it less profitable to engage in domestic oil and natural gas exploration and drilling.
In the same FY2013 budget, President Obama has favorably targeted so-called “clean” energy for a variety of direct subsidies and preferences. The administration’s top ten budget provisions for green energy include the following:
• Extending the production tax credit (of 2.2 cents per kilowatt-hour of electricity) for wind energy through calendar year 2013.
• Extending the Treasury Cash Grant Program (Section 1603 of the American Recovery and Reinvestment Act) to assist small renewable energy companies through 2012, extending tax credits (for renewable companies able to use the credits) for one year, and converting the program into a refundable tax credit through 2016.
• Increasing research and development funding to $350 million for advanced energy technologies (up from $40 million disbursed by the U.S. Department of Energy over the last two years).
• Expenditures for clean domestic manufacturing, with $290 million for improving industrial processes and materials, and $5 billion for the “48C” clean energy tax credit available to manufacturers of “cleantech” products.
• Expenditures for solar and wind energy, providing $310 million for the SunShot Initiative, a program designed to make solar energy cost competitive with fossil fuel energy without government subsidies by 2020, and $95 million for wind energy, including expansion in offshore wind technologies.
• Expenditures for energy efficiency, including an 80 percent increase in funding to promote energy efficiency in commercial buildings and industries.
• A 10 percent increase in funding for the U.S. Environmental Protection Agency’s FY2013 budget for implementation and enforcement of federal environmental safeguards, and $222 million for the U.S. Department the Interior’s newly formed Bureau of Safety and Environmental Protection.
• Expanding Department of Defense clean energy initiatives, including doubling (to $1 billion more than the FY2012 budget) expenditures for efficiency retrofitting of buildings and meeting efficiency standards for new facilities.
• Maintaining funding (at the FY2012 budget level) for international climate financing, with at least $833 million to support sustainable landscapes, clean energy, and adaptation to climate change in developing countries.
What makes this differential tax treatment especially misguided at this time is that the oil and natural gas industry has been one of the most robust sectors of the economy, actively creating the “shovel-ready” jobs that Obama agrees are so critical to the economic recovery.
Overall employment in the U.S. economy still remains short by almost 5 million jobs, and more than 3 percent below the pre-recession employment peak in November 2007. But the oil and natural gas industry has added 34,200 jobs over that period and expanded industry employment by more than 22 percent. Oil and natural gas companies have been on a hiring spree, adding almost 100 new payroll jobs every day for the last year.
In contrast, job creation in green energy projects has so far been very disappointing. According to a recent Wall Street Journal analysis of $4.3 billion in public funding for wind energy under Section 1603 of the American Recovery and Reinvestment Act, there were 36 wind farms that employed 7,200 American workers during the peak of their construction, or an average of 200 workers per project. Today, according to these companies and state and local government economic development officials, those projects employ only about 300 workers, at a cost to taxpayers of more than $14 million per permanent job.
And consider the solar sector. Struggling company Abound’s recent announcement of 180 layoffs was the latest example of an ongoing solar shakeout that started with Solyndra’s bankruptcy last fall and the loss of 1,100 jobs. According to the Washington-based Solar Energy Industries Association, there are more than 37,000 additional solar jobs at risk, because the $10 billion of taxpayer-funded subsidies for renewable energy that were part of the aforementioned 2009 stimulus program expired in December.
The oil and gas industry could be creating even more jobs if the United States had more of a pro-development policy for traditional energy sources instead of a government-driven, heavily subsidized, green energy approach. For example, energy consulting firm Wood Mackenzie evaluated the impact on production, jobs, and government revenues of implementing regulatory policies that support the development of oil and natural gas resources, including: a) opening federal land that is currently “off limits” to exploration and development; b) lifting the drilling moratorium in New York; c) increasing the rate of permitting in the offshore Gulf of Mexico; d) approving the Keystone XL and other future Canada-to-U.S. oil pipelines; and e) leaving regulation of shale resources predominantly at the state level.
Under a scenario that encourages the development of new and existing domestic energy resources, Wood Mackenzie estimates that by 2015 an additional 1.27 million barrels of oil equivalent (BOE) could be produced, rising to 10.4 million BOE by 2030. That would be a 47 percent increase over the estimated 2030 production levels under a current development path case.
Furthermore, under the new development path, there would be a potential increase of 1 million new oil and natural gas jobs by 2018, and 1.4 million new jobs by 2030, while adding cumulative potential government revenue of $36 billion by 2015, and nearly $803 billion by 2030.
America’s manufacturing sector is another area of robust job growth, and manufacturing companies have hired almost 400,000 new workers since the beginning of 2010. U.S. energy and tax policies have important implications for the manufacturing sector because of the energy intensity of America’s industrial sector. In 2010, it was estimated by the U.S. Energy Information Administration that roughly one-third of total U.S. delivered energy is consumed by the manufacturing sector. Additionally, total industrial demand for delivered energy will increase 16 percent by 2035. Nevertheless, the government estimates that fossil fuel consumption will decline only modestly, from 83 percent of total U.S. energy demand currently, to 77 percent in 2035. Therefore, traditional energy sources of oil and natural gas will continue to play a major role in providing stable supplies of affordable energy to America’s factories. To the extent that oil and natural gas companies are targeted with higher taxes or unfavorable regulatory policies by the Obama administration, American manufacturers will be hurt by higher energy prices, which could jeopardize job growth in one of the economy’s key sectors.
Obama’s tax proposals to favor solar and wind energy over traditional energy sources like oil and natural gas might make sense for him politically, but can’t be justified with either economic or scientific principles. Obama’s policies are destined to damage the economy because they will penalize the efficient, job-creating oil and natural gas industry, which requires no direct taxpayer subsidies beyond what any American manufacturer is entitled to, and because they will raise energy costs for American consumers and manufacturers. Meanwhile, subsidizing the inefficient green-energy industry with generous amounts of taxpayer money would destroy jobs on net and raise energy costs.
Mark Perry is a scholar at the American Enterprise Institute. Thomas A. Hemphill is associate professor of strategy, innovation, and public policy at the University of Michigan-Flint’s School of Management.
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