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House democrats topped off their 100-hour agenda by passing an energy bill by a 264-163 vote. The bill would repeal tax breaks for oil companies and allocate the funds toward alternative energy. That bill, The Creating Long-Term Energy Alternatives for the Nation Act of 2007 (H.R. 6), is now on the Senate calendar. H.R. 6 will neither reduce dependency on foreign oil nor decrease gasoline prices for the American consumer. H.R. 6 would cut back two tax code provisions favorable to domestic oil and gas companies: the manufacturer’s deduction under the American Jobs Creation Act of 2004 and the amortization of geological and geophysical costs under the Energy Policy Act of 2005. These changes would reduce deductions against income for the cost of new domestic oil and gas drilling and raise taxes paid by oil companies. Typically, when companies drill on public lands or in federally controlled waters such as the Gulf of Mexico, they pay a royalty or fee on the oil and gas extracted. For offshore extraction, royalty rates vary between 12% and 16%. H.R. 6 modifies this federal royalty program. It would increase fees paid by companies drilling in the Gulf of Mexico under certain leases signed in 1998 and 1999 that contained exemptions from royalty payments. The problem with this approach is that the tax code and royalty program have nothing to do with energy prices. The price of gasoline is set by supply and demand, not by the taxes and royalties paid by oil companies. Next to energy security, the purpose of H.R. 6 is to increase revenues to fund alternative energy programs. Despite tremendous growth in the industry, the primary alternative fuel, ethanol, accounts for a mere 0.89% of total oil use and is estimated to increase to only 1.99% of total use by 2030. Even with President Bush’s support for a major increase in the renewable fuels standard, which requires minimum amounts of ethanol use, domestic capacity for ethanol production cannot supplant petroleum-based fuels. Discouraging domestic oil production through increased taxes to promote ethanol, which cannot displace foreign oil production, makes us more dependent on foreign producers. H.R. 6 will not add even a single gallon of gasoline to the nation’s energy supply and will be counterproductive by discouraging domestic energy production, reducing supply and raising prices. H.R. 6 and tax fairness The Democrats’ assertion that the domestic oil and gas sector is undertaxed may have been popular campaign rhetoric last year, but is not supported by evidence. Income taxes paid by this sector reached a record $71 billion in 2005, up from $48 billion in 2004 and $32 billion in 2003. Revenues from other taxes on the oil and gas sector are also up. Oil and gas companies face tax rates comparable to or higher than those of other industrial sectors. Further, the Bush Administration recently announced an increase in the royalty rate from 12.5% to 16.7% for new deepwater leases in the Gulf of Mexico. Industries should be taxed on a level playing field, which should be leveled by lowering rates, not by raising them. It is inappropriate to single out the oil and gas industry from all others for punitive tax treatment. Tax increases on any industry make that industry less competitive with its foreign counterparts. H.R. 6 is nothing more than punishment of an industry through higher taxes. Ironically, Democrats, who have lambasted the Bush Administration on its policy in Iraq, are now laying the foundation for future U.S. involvement in the Middle East by increasing our dependence on oil from that region. Most importantly, the pending legislation will cause harm in the long run by discouraging investment in new domestic drilling for oil and gas. America’s demand for energy is growing, and it needs more domestic oil and natural gas. Increased taxes would leave the oil and gas industry with fewer after-tax revenues to reinvest in new exploration and production. Higher taxes would make new domestic projects less attractive. Finally, increased energy taxes give a competitive advantage to OPEC and other non-U.S. oil producers that are not subject to most of these provisions. Recent Department of the Interior studies confirm that the United States has substantial oil and gas deposits. Much of those resources are off limits due to legal restrictions. Reducing these restrictions on domestic exploration and drilling will allow for greater supply and lower prices in the years ahead. Further expanding the resource base would lead to far greater increases in tax and royalty revenues than H.R. 6 ever could-providing the funds needed to make more substantial investment into the development of alternative fuels like ethanol and biodiesel. This approach promotes both economic security and protects our environment.

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