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Federal debt won't be fixed with higher oil taxes

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Unless the country’s $14.3 trillion debt limit is raised by Aug. 2, the White House warns the federal government will be unable to pay its bills and risks defaulting on its debt. Some Democrats think more taxes on oil producers is the answer.

“We should be able to get deficit reduction by closing special interest tax loopholes, getting rid of oil industry subsidies, that kind of thing,” Rep. Chris Van Hollen, D-Md., recently told reporters.

Many Democrats, including the president, believe the energy industry is sufficiently profitable and eliminating its tax deductions wouldn’t hurt the economy, while the added tax revenue would help pay off debts. This reasoning is wrong.

Raising taxes on energy producers won’t improve the federal government’s long-term financial outlook, but it would cut investment in energy development, reduce job creation and raise prices at the pump.

The truth is the bulk of tax deductions afforded oil and natural gas producers aren’t special political favors, as critics paint them. They’re essentially the same kind of deductions available to every other industry that enable companies to recoup operation costs and only get taxed on net income. Other deductions are typical for companies dependent on innovation and exploration.

The Intangible Drilling and Development Costs deduction allows companies to exempt the costs incurred finding and developing new oil fields. This deduction is used for expenses like wages for researchers that create new drilling techniques and equipment. The Tertiary Injectants Deduction is a write-off for some costs involved with reviving old wells.

As much as 80 percent of expenses associated with the average well are exploration costs. Deductions like these incentivize the creation of new wells, which in turn expand domestic oil production, fuel economic growth and generate jobs.

The oil and natural gas industry supports more than 9.2 million jobs across the country. Targeting these companies for tax increases would slow down, or completely choke off new job creation.

National unemployment remains more than 9 percent, with roughly 14 million Americans looking for work. Tax policy should incentivize job creation, not stifle it.

A 2010 analysis by consultancy Wood MacKenzie warns that scaling back oil industry deductions would cause a 1 percent drop in domestic oil production and put 165,000 jobs in jeopardy. New taxes on oil producers would also cause higher prices at the pump.

It’s good that Democrats and Republicans are discussing how to tackle the debt crisis. And tax reform is long overdue. But singling-out oil companies for tax hikes is a dumb, short-sighted political stunt, not smart economic policy. U.S. public debt increases by roughly $125 billion per month – more oil tax revenue would be a drop in the bucket.

Instead, a smart move would be to drastically cut federal spending, simplify the tax code, and lower tax rates to incentivize investment and production, spurring job creation.

The country is at a fiscal crossroads. Demonizing oil and gas producers might be good politics, but it won’t fix anything. Increasing energy taxes would undermine exploration and job creation, and force average Americans to pay more at the pump.

Lawrence J. McQuillan is director of business and economic studies at the Pacific Research Institute.

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