Among the many suggestions for deficit reduction in the recently released Fiscal Commission report is a 15 cents-per-gallon increase in the federal gasoline tax.
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 is 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 concluded 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’ offshore areas hold even greater potential but are also constrained. No other energy-producing nation on Earth has limited its own energy producing potential 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 drilling rights – both offshore and onshore – is only the first installment in payments to the federal Treasury. 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 some recent years. With more leasing, royalty revenues would go up in the years ahead, as new oil and natural gas wells come online.
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. 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 cents-per-gallon gasoline tax increase.
But unlike a tax hike, allowing additional supplies of domestic oil to come online would lower prices for gasoline, 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 manner that reduces energy costs, it would deliver yet another benefit that no tax increase could provide, job creation. A 2009 study conducted by the American Energy Alliance estimates a potential gain of 270,000 jobs from expanded offshore leasing.
There are now bills in Congress that would reap the multiple benefits from enhanced production of American energy, including the No-Cost Stimulus Act (S. 570 and H.R. 1431), American Energy Innovation Act (H.R. 2828), American Energy Act (H.R. 2846), American Conservation and Clean Energy Independence Act (H.R. 2227), and others. All would serve as a good blueprint as the next Congress continues to grapple with high deficits, high energy prices, and high unemployment.
President Obama said the freeze “would save $2 billion over the rest of this fiscal year and $28 billion in cumulative savings over the next five years.” Some economists claim that barely scratches the surface of the real savings that could be achieved if federal pay were brought into line with private sector wages.
Federal salaries have ballooned over the last few years and are far greater than salaries in the private sector. USA Today reports that, “the number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office”
As James Sherk of the Heritage Foundation notes, “Federal employees earn between 30 percent and 40 percent more than equivalently skilled private-sector workers…[M]ost federal compensation is not a contractual obligation and Congress can reduce it in those positions which are overcompensated. If Congress reduced this federal pay to market rates this would save taxpayers about $47 billion a year.”
Chris Edwards of the Cato Institute also discusses the inequity between federal government workers and those in the private sector. In a June study, he found that government sector workers earned an average annual wage of $81,258 in 2009, while private sector workers only earned an average of $50,464. He also notes that government salaries rose on average by 58 percent in the last decade while private sector salaries rose by only 30 percent.
Union officials have strongly criticized the freeze. American Federation of Government Employees President John Gage denounced it as the “scapegoating” of federal employees and “a superficial, panicked reaction to the deficit commission report.” AFL-CIO President Richard Trumka called the freeze “bad for the middle class, bad for the economy and bad for business.”