Congress's Disastrous Energy Diversion

Congress still has an awful lot of work to do in a very short period of time if its members want to spend more than a couple of days around Christmas at home with their families. The must-pass list is lengthy, including at least: a continuing resolution or omnibus spending bill to keep the government open, a patch to prevent the alternative minimum tax from slamming the middle class, a farm bill to extend or replace the expiring 2002 version, and an extension of the expiring State Children’s Health Insurance Program. With all that and more to do in very little time, the Senate will instead spend time today on a reckless, costly energy bill that has no urgency other than political grandstanding.

Higher taxes and onerous regulations on energy production and use will cost American taxpayers considerably. The energy bill would hike taxes for oil companies, making domestic producers less competitive and increasing America’s dependence on imported oil. It also has costly mandates that will raise prices for motorists. Those are, in effect, tax hikes.

Last week the House passed and the Senate rejected an energy bill of which the most costly provisions were $21 billion in tax hikes (mostly on oil companies), steep increases in Corporate Average Fuel Economy (CAFE) standards that would raise car prices and make American automakers less competitive, a national Renewable Fuels Standard (RFS) that would raise prices and the pump and risk fuel shortages, and a national Renewable Electricity Standard (RES). The RES would have sent electricity prices through the roof in many states by requiring that all states generate 15 percent of their electricity from certain politically correct technologies, mostly wind and solar.

That prosperity-killing bill was rejected, falling 7 votes short of the 60 needed for passage. Senators quickly moved into negotiations to retool the bill and bring it back. It was widely expected that the new version would remove the tax increases as well as the Renewable Electricity Standard. We found out yesterday that while the RES title was removed, the tax hike title was reworked, not removed, and in fact the new version has an additional $800 million in tax hikes.

The bill the Senate will vote on today would single out large oil companies for higher taxes by making them ineligible for the Section 199 Domestic Production Activities Deduction, the tax incentive for manufacturing that was implemented in 2004 as a replacement for the old extraterritorial income exclusion. Other tax hikes include limiting the deductibility of foreign taxes paid on oil production and longer amortization tables for geological and geophysical expenditures (but only for larger oil companies).

These provisions single out one industry for higher taxes, which is a hallmark of bad tax policy.

Economists are nearly unanimous that higher taxes on oil companies will discourage domestic oil production, which the 1980s experience with a windfall profits tax powerfully demonstrated. Moreover, higher taxes will raise prices throughout the supply-chain, ultimately raising the price at the pump for consumers.

The tax title also includes a major new financial market regulatory requirement that has nothing to do with energy: basis reporting. It would require brokerages and other financial services firms to calculate and report capital gains basis information — how much investors paid for securities — to the IRS. Requiring brokerages to track and report this information would impose a significant regulatory burden on a U.S. financial services sector at a time when it is already under enormous strain. And the requirement would be more complex than simply noting the original purchase price, since financial services firms would also be required to adjust the cost-basis for corporate actions that affect valuation, such as stock splits and mergers.

The tax title is only half of what’s wrong with this bill. Along with a thousand pages of new regulatory requirements and subsidies that will distort markets and introduce dizzying complexity to the entrepreneurs most likely to innovate, the new bill still includes both CAFE and RFS.

Corporate Average Fuel Economy standards endanger American lives and jobs. The National Academy of Sciences found that existing CAFE standards are responsible for between 1,300 and 2,600 highway fatalities per year because the smaller, lighter cars required by CAFE are less safe. Increasing the standards 40 percent, as this bill would do, would exacerbate this problem. CAFE disproportionately hurts domestic automakers. Japanese manufacturers sell so many compact cars that their business wouldn’t be affected by higher fuel-efficiency requirements. European manufacturers don’t comply with CAFE at all — they just pay the fines for noncompliance as a cost of doing business. Detroit doesn’t have that option, because liability concerns force them to comply with CAFE mandates. And because Detroit relies largely on heavier, more powerful vehicles, they would be hit especially hard.

The Renewable Fuels Standard would require a staggering 36 billion gallons of so-called renewable fuels by 2022. That translates to about $50 billion in higher motor fuel costs, a big jump in prices at the pump that is several times bigger than the direct cost of the tax provisions. But the problems with the RFS go well beyond cost — the level may simply be unattainable due to inadequate lead time to reach the target levels set for early years. These requirements could cause shortages and undermine the reliability of our fuel supply.

There also may be other serious unintended consequences. One is groundwater contamination. Biofuels are water-soluble, unlike gasoline, which means spills and tank leaks are much more difficult to clean up and can do much more damage to public health. Another is food prices. We have already seen corn prices skyrocket under the existing ethanol mandate, and the 36 billion gallon requirement would divert an unprecedented amount of land from food production to energy production, hitting Americans with higher food prices.

Congress should scrap the anti-growth, anti-consumer energy bill altogether and focus on trying to find pro-market, pro-taxpayer outcomes on this year’s true must-pass legislation.