Counterproductive Taxes Proposed During Earnings Slump

Jane Van Ryan
Posted February 1, 2010

The White House released its 2011 budget proposal today, containing several new taxes on the oil and natural gas industry.

Among the administration's proposals are tax hikes on:

• Domestic oil and natural production amounting to about $36.5 billion;
• Dual capacity and international tax changes estimated at $8.5-12 billion;
• Repeal of the LIFO (last-in, first-out) accounting practice, which is likely to cost the industry between $23-26 billion; and
• The reauthorization of Superfund, which could cost oil and natural gas companies approximately $9.4 billion.

These tax increases could add roughly $80 billion to the industry's tax bill, making the production of oil and natural more expensive. And they're being proposed at a time when the effective tax rate for the industry has been around 53 percent as opposed to 32 percent for the rest of the S&P Industrials (2008--most recent data available).

As API's President and CEO Jack Gerard said today, "Imposing new taxes would reduce our nation's energy security by discouraging new investment in domestic oil and natural production and refining capacity and pushing those investments--and American jobs--abroad."

The administration's tax hikes were announced just as several energy companies were releasing their earnings reports for the past year, indicating the oil and natural gas industry did not keep pace with other industries.

With seven major oil and natural gas companies reporting their earnings so far, the industry earned on average 4.8 cents per dollar of sales in both the 4th quarter and all of 2009. In comparison, the Dow Jones Industrial Average companies have reported earnings of 10.2 cents per dollar sales of the 4th quarter and 9.5 cents for the entire year with 21 of the 30 companies reporting to date.

Rather than raising taxes, the economy could be better served by allowing the oil and natural gas industry to make investments in additional domestic energy supplies. If the industry were given access to areas that have been off-limits, it could create hundreds of thousands of jobs and generate revenues in the form of royalty payments and leasing fees to federal, state and local governments.