Fiscal Commission Should Support Increased Energy Production, Not Increased Energy Taxes

Among the many suggestions in the Fiscal Commission’s draft report is a 15 cents-per-gallon increase in the federal gasoline tax. No doubt, this proposed tax hike would raise revenues and make a modest dent in the deficit, but it would do so at the expense of the driving public and would disproportionately burden low-income motorists. There’s a better way. If raising energy-related revenues is the goal, why not fill federal coffers in a manner that actually reduces the price at the pump? Washington can accomplish this by allowing more oil drilling.

The federal government controls all offshore areas beyond three miles from the coast as well as vast expanses of energy-rich western lands. Unfortunately, only a fraction of these areas have been opened to energy leasing, due to legislative and regulatory restrictions. For example, a 2008 Department of the Interior report notes that only 8 percent of the estimated 31 billion barrels of oil beneath federal lands is fully available for leasing, while 30 percent is subject to significant restrictions and 62 percent is entirely off-limits. America’s offshore areas hold even greater potential but are also constrained. No other energy-producing nation on earth has limited itself to this extent.

Even with these restrictions, revenues from new energy leases reached $10 billion dollars in 2008. However, the Obama administration has thus far cracked down on domestic energy leasing, which helps explain why leasing revenues dropped below $1 billion in 2009 and don’t look to be much higher in 2010.

The up-front money the highest bidders pay to win these leases for offshore or onshore drilling rights is only the first installment in the payoff to the federal treasury. The energy companies also pay annual rents on each lease, and unless they hit a dry hole they must pay royalties of up to 18.75 percent on every barrel of oil and cubic foot of natural gas produced. Royalty revenues vary with energy prices as well as production levels, but have exceeded $9 billion in several recent years. With more leasing, royalty revenues would go up in the years ahead as new wells come online and start producing oil and natural gas.

Even more significant than the leasing and royalty revenues are the potential tax revenues. Energy company profits are subject to the federal corporate income tax as well as other levies — and the more energy produced the higher the taxable income.

Overall, the extra federal revenues from a judicious expansion in domestic energy production could easily reach into the tens of billions annually, quite possibly eclipsing the $25 billion or so from the proposed 15 cent per gallon gasoline tax increase. But contrary to a tax hike, allowing additional supplies of domestic oil to come online would lower gasoline prices, as well as those for natural gas and heating oil.

It would be an understatement to call increased domestic drilling a win-win situation. Compared to the proposed gasoline tax, it would be win-win-win. While raising federal revenues in a way that reduces energy costs, it would deliver yet another benefit no tax increase could provide – job creation. One study estimates a potential gain of 270,000 energy industry jobs from expanded offshore leasing.

Bills like the No-Cost Stimulus Act (S. 570 and H.R. 1431), The American Energy Innovation Act (H.R. 2828), the American Energy Act (H.R. 2846), the American Conservation and Clean Energy Independence Act (H.R. 2227), and others seek to reap the multiple benefits from enhanced production of American energy. All would serve as a good blueprint as the next Congress continues the look for solutions to high deficits, high energy prices and high unemployment.

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