The foolishness of energy tax increases

Posted Aug. 25, 2010, at 2:21 p.m.

I was troubled to read the Aug. 17 Bangor Daily News editorial, “Oil Industry Fair Target,” that highlighted the federal energy taxes being debated in Congress and Americans for Prosperity’s opposition to new energy taxes.

The editorial was a response to a press conference that Americans for Prosperity’s Maine chapter held to highlight the negative impact of high energy taxes on Maine families. Sen. Olympia Snowe responded to our press conference by telling WCSH TV: “I share their concern about raising taxes at this point, that it could translate to increased cost for consumers both in terms of gasoline and home heating oil.”

Interestingly, the Bangor Daily News did not send anyone the quarter-mile down Main Street to Geaghan’s Restaurant for our press conference. Had the BDN attended, it would have had an opportunity to report facts, both about the size of the tax hike Senate Majority Leader Harry Reid proposed and its likely impact on consumers versus shareholders.

While nobody asked about the impact on profits at our press conference, the topic did come up on a WGAN radio interview, where I explained that even if taxes fell largely on profits – notwithstanding the strong evidence that most of the cost would pass through to consumers in the form of higher prices – shareholders are people too, and lowering the considerable profits of oil companies would have a much bigger impact on regular people than corporate insiders. This is a point conveniently ignored by advocates of higher taxation.

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A 2007 study by Robert Shapiro found that corporate insiders hold just 1.5 percent of oil company stock, compared to 23 percent held by individual investors and a combined 70.5 percent held by mutual funds, pension funds and IRAs. The point here is that there is no free lunch, even in the unlikely event that some or most of the impact of higher taxes fell on shareholders instead of consumers.

Just before they left for August recess, the House of Representatives – with the support of Maine Reps. Mike Michaud and Chellie Pingree – narrowly passed a tax hike of $2 per barrel on oil and 20 cents per million BTUs for natural gas. These taxes would apply only to domestic production, and would have an estimated impact on the price of retail gasoline and home heating oil of between 8 and 12 cents per gallon.

The draft Senate version presented by Majority Leader Harry Reid includes a smaller, but still substantial, tax hike on crude oil by raising the tax paid into the Oil Spill Liability Trust Fund from 8 cents to 49 cents per barrel – which would result in about an $18.3 billion tax increase.

Despite President Barack Obama’s repeated promises that he will make BP “pay every dime” for the costs of cleanup and economic damage, this tax hike would force taxpayers to pick up much of the cost of the oil spill response.

In theory, the fund is now needed less than ever, with BP having committed – and rightly so – to pay in full for the spill response. In fact, now might be an excellent time for a fundamental reform that officially scraps the now-obsolete fund in favor of a private reinsurance pool that would build real assets to pay for rare crises like the current BP spill.

Because the tax applies to every barrel of crude oil in the country, it will almost entirely be passed down the chain of production and ultimately fall on retail customers – in other words, precisely the taxpayers that Obama claimed would never be forced to pay for the gulf cleanup.

This tax would likely increase the cost at the pump by about 2 or 3 cents per gallon, which on its own isn’t going to break the bank for most families. But if its supporters can successfully rely on the fiction that a tax on crude oil isn’t going to be passed on to consumers, they can smooth the way for four or five other similarly sized tax hikes that would combine to dramatically increase prices.

With the economy still suffering, significant hikes in any federal taxes should be off the table, at least until we return to normal levels of employment and output. Energy taxes are foolish at a time when many families are already struggling to make ends meet. Fortunately, Sen. Olympia Snowe understands the implications of higher energy taxes for Maine better than the Bangor Daily News does, and we hope she will help keep tax hikes out of any Senate spill-response bill.

Phil Kerpen is vice president for policy at Americans for Prosperity

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