Eliminating Deductions for the Oil and Gas Industry is Not a Solution to the Nation’s Debt Crisis.

The Texas Society of Certified Public Accountants (TSCPA) recently published a paper analyzing President Obama’s proposed FY 2014 budget. TSCPA began its non-partisan analysis by quoting from the President’s budget message that stated he wanted to “eliminate unnecessary fossil fuel subsidies that impede investment in clean energy sources.” TSCPA noted that the President hopes that by eliminating certain oil and gas subsidies that $90 billion in revenue will be generated. TSCPA explains the economic reasons why certain deductions that the oil and gas industry use are normal business deductions not unlike deductions that other industries legitimately use in their operations. Below are some of my comments on the points that they have made. For the complete TSCPA paper, please click here.

The President’s Proposal Would Actually Do More Harm to the Economy.

After reading TSCPA’s paper, my conclusion was the same as theirs, i.e., not only would the oil and gas industry be harmed, but that the overall economy would be harmed by the President’s proposal. A key observation of TSCPA was that “[s]tudies have shown that this [proposal] would discourage production, lead to fewer well-paying American jobs, increase our reliance on foreign imports and potentially result in higher energy costs for consumers.” Another key TSCPA observation was that 95% of the nation’s oil and gas wells are drilled and operated by small producers who employ an average of 12 people. These two facts alone render the President’s position incredible and indefensible.

TSCPA continues its analysis by stating that if these small businesses were to lose these cost savings deduction, they would have to lay off workers and certain jobs would necessarily be moved overseas. TSCPA notes that the President fails to recognize that the oil and gas industry directly employs 2.6 million people. It also employs another 7 million indirectly. This represents over 5% of the overall U.S. employment. I note that the true unemployment rate is much higher than the 8% that the President tells us. The last thing we need is another hit to a specific industry. Indeed, attacking the legitimate deductions oil and gas industry will have a ripple affect across many related industries.

Some communities, like those within the Permian Basin, have a specialized economy as opposed as to a diversified economy. Strategic planners try to encourage their communities to diversify their economy to prevent busts in certain sectors from causing more harm. The concept of not putting all of one’s own eggs in one basket is the theory. However, in practice, the diversification is not easy to implement. With that said, the Permian Basin’s economy is so dependent upon oil and gas income that if there were a major downturn in product prices, there would be an immediate effect on all businesses. As a young college student in Dallas, I remember the bust of 1986. As a small business owner, I saw the bust of 1998. In both instances, people who were not directly employed by the oil and gas industry were put out of work because those who were employed by the oil and gas industry were laid off or transferred. Those people who stayed in the Permian Basin curtailed or stopped spending entirely. In just a short time, small businesses such as restaurants, ballet studios and framing shops were closed. Downtowns of some communities were as quiet on Tuesdays as they were on Sunday mornings. Ripple effect.

TSCPA also points out that the oil and gas industry is also prospering in its stated goal which is finding and developing oil and gas domestically so that we can reduce the U.S. reliance on foreign oil. The implication from TSCPA is clear, if an industry is creating good paying jobs, decreasing the outflow of U.S. dollars to countries that actually hate the U.S. and, at the same time, increases America’s financial standing and sovereignty, this is not just a good industry to have, but it is an industry that needs to be encouraged. Whether or not the President personally likes the industry is beside the point.

I also add that one of the biggest threats to U.S. sovereignty is the trade imbalance that is partially created by the high cost of foreign oil that the U.S. needs in the manufacturing sectors. TSCPA points out that based upon current trends, the U.S. is on track to overtake Saudi Arabia for oil production in 2020. By 2030, the U.S. could be completely energy dependent. I would note that if the President were to open up the vastly rich untapped areas of Alaska in addition to the west and east coast to oil and gas production, the U.S. could be energy independent that much sooner. I also note that that a lot of those areas are controlled by state or federal jurisdictions and those jurisdictions would be the direct beneficiary of those increased oil and gas products.

So, if an industry generates enormous benefits (not just capital) for the country as a whole and the President wants to burden it with more taxes, I have to ask myself these questions: “So why does the President want to change a major financial incentive to any successful industry that will actually have harmful, long-term consequences to not only that industry but to the entire country’s economy?” “Does he really think that eliminating deductions will generate that much more income?” “Does he not realize that we will have that much more revenue growth through further exploration and development?” “Does he really want to do away with the use of domestic oil and gas?” These questions have been raised before directly to the President. However, sometimes the answers given to the questions seem to be incongruent to the President’s actions.

Conclusion.

TSCPA has done a fantastic job in making a nonpartisan analysis of the President’s proposal of eliminating important tax deductions for the oil and gas industry. Their conclusion that such deductions need to remain in place to “attract investors to high risk energy exploration and development projects” is spot on. More policy discussion on the President’s budget proposal needs to take place. We need to discuss why the President uses the politically charged word “subsidy” when the correct term is “deduction.” We also need to discuss the President’s record of success in “investment[s] in clean energy sources.” More importantly, we need to discuss why limiting our federal spending is not a better solution rather than raising revenue. We need to urge Congress to reject the President’s FY2014 budget as it relates to the elimination of tax deductions for the oil and gas industry. And, we need a President that really understands the importance of being self-reliant when it comes to energy resources.