Sunday, August 05, 2007

Punishing "Big Oil"

Various news media outlets are reporting on the latest energy-related bills passed by the House on Saturday. One bill contains various incentives for alternative energy sources. The other increases taxes on domestic oil companies.

I have not yet studied the alternative energy bill, though I am deeply skeptical of the federal government’s ability to choose among various alternative energy sources. One provision, for example, requires investor-owned utilities to produce 15 percent of their electricity from renewable sources. No doubt this will help the wind turbine industry in areas where this technology is feasible. However, if wind power is not cheaper than conventional sources, this will tend to increase the costs to consumers, not to mention the aesthetic impacts on the environment. I wonder if, as a result of this legislation, Teddy Kennedy will now have to accept a few windmills off of Martha’s Vineyard. We’ll see how that will fare in the Senate.

As for the tax bill, here is the real problem: raising taxes on domestic oil production activities is not a prescription for expanding supplies and reducing fuel costs in this country. We still need conventional oil, and we will continue to need it for years to come. Consumers will be hurt by this tax, and so will investors in conventional energy production. Shares in oil firms, like Conoco Phillips (COP), have responded with large declines. Apparently in anticipation of Saturday’s vote, shares dropped over 3 percent in Friday’s trading. BP and Exxon Mobil followed suit.

Part of the drop can be attributed to the repeal of the section 199 deduction for domestic production activities for “big oil”. Section 199 was enacted to address global competitiveness for U.S. manufacturing and production activities. It provided a phased-in tax deduction of up to 9 percent of income (limited by the amount of wages paid) which becomes fully effective in 2010. With a 35 percent corporate tax rate, that translates to a tax rate reduction of just over 3 percentage points. For 2007-09, the deduction is only 6 percent, which translates to a tax rate reduction of just over 2 percentage points.

Thus, our ever-so-wise House just decided to raise tax rates by 2-3 percent on an activity that we desperately need if we are to match the growing domestic and global demand for oil. Let’s see if the voters understand that this will likely translate into higher gas prices during the upcoming political season.

A rollcall listing of votes on the tax portion of the bill can be found here:

Locally, representatives Terry (R NE) and King (R IA) both voted against the tax bill. Kudos to both.


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