March 23, 2012

New Study Shows That Removing Oil and Gas Industry Tax Credits Would Cost Jobs, Increase the Deficit

The oil and gas industry is under attack not only in Texas, but nationally. Several months ago, a new study by Louisiana State University Professor Joseph Manson, An Economic Analysis of Dual Capacity and Section 199 Proposals for the U.S. Oil and Gas Industry, was released. Professor Manson's study found that tax changes proposed by the Obama administration would actually increase the deficit.

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One of Obama's proposals would prohibit oil and gas companies from using the manufacturer’s deduction created by Section 199 of the American Job Creation Act of 2004. The other proposal would create limits on foreign tax credits used by U.S. dual-capacity taxpayers. The Obama administration claims that these changes would lower the deficit and has included them in every annual budget proposal. Instead, Professor Manson demonstrates that these proposals would result in a loss of $53.5 billion a year in tax revenue.

Section 199 allows taxpayers who produce or manufacture in the United States to deduct a certain percentage of domestic production activity from their taxable income each year. The dual-capacity taxpayer rules prevent U.S. firms operating in foreign countries from being doubly taxed. Professor Manson’s study, sponsored by the American Energy Alliance, took a detailed look at the effect that the loss of these credits would have on the oil and gas industry. Professor Manson concluded that there would be a loss of 155,000 lost jobs, a loss of $68 billion in wages, and a loss of $83.5 billion in reduced tax revenues. Not only that, beware the unintended consequences: as more people are laid off, more people will request unemployment benefits, food stamps and other forms of assistance.

Professor Manson made his calculations using the Modern Regional Input-Output Modeling System II, developed by Nobel Economic Laureate Wassily Leontief, which supposes that when a company has to pay $1 more in taxes, it must take it out of other sources, such as workers’ pay. As a result, Professor Manson notes: “[A] tax on just a small number of firms can be felt throughout the economy.” He found that job losses go beyond those strictly related to oil and gas production: construction, retail, food services, and even arts and entertainment would feel the pain. Not only would there be significant job losses, but also the U.S. could suffer $341 million in lost output. The region hardest hit would be the Gulf of Mexico, where the local community has already suffered extensively following the Deepwater Horizon tragedy.

Professor Manson has a long, distinguished history in finance. He has been a Senior Fellow at The Wharton School since 2005. He was a Visiting Scholar for the Federal Deposit Insurance Corporation and the Federal Reserve Bank of Philadelphia. He has consulted for government agencies, research institutions, and corporations on issues ranging from mortgages to consumer lending to valuing distressed securities. He has also testified before numerous government committees, including the Senate Judiciary Committee, the House Financial Services Committee, the Federal Reserve Board, and the European Parliament. His opinions are valued and respected, which is why his conclusions in the new study should not be dismissed.

The repeated introduction of these proposals confirms that the Obama administration’s approach to the oil and gas industry is misguided. It treats all companies as though they are greedy conglomerates hoarding billions at the expense of the average American. In fact, this study shows that oil and gas companies benefit Americans in a variety of industries every day. Singling out these companies by removing these particular tax benefits means that everyone would feel the pain.

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