How will the 2012 budget proposals affect energy security and prices? During today's OnPoint, Pete Sepp, executive vice president at the National Taxpayers Union, discusses President Obama's and House Budget Committee Chairman Paul Ryan's (R-Wis.) budget proposals. He explains why he believes repealing oil and gas subsidies will be counterproductive to stimulating the economy and previews the budget debate.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Pete Sepp, executive vice president at the National Taxpayers Union. Pete, thanks for coming back on the show.
Pete Sepp: Great to be here.
Monica Trauzzi: Pete, although Congress was able to pass a short-term budget deal earlier this month, the debate ahead on the 2012 budget is likely going to be a rocky one. What does the short-term deal tell you about what's ahead on the 2012 budget?
Pete Sepp: Well, I think there are going to be substantive policy differences over not only taxes on energy, but also the kind of spending programs that will be resulting.
Monica Trauzzi: So we've all had the opportunity to take a look at President Obama's proposal and also Chairman Ryan's proposal. How will each budget affect energy costs specifically for Americans?
Pete Sepp: Certainly the president's proposal to repeal what he calls tax preferences for oil and gas companies will raise prices of most energy in America. It's a real problem I think in terms of defining these policies as not just repealing subsidies as he claims, but rather getting rid of policies that protect lots of companies from double taxation abroad. We have his desire to repeal the dual capacity tax credit and what that's going to do, of course, is take away one credit that has helped to minimize some of the damage from our very complex and burdensome corporate tax system. What it will do is double tax our earnings of our oil companies abroad, put them at a competitive disadvantage, allow state-run firms in places like China and Russia to get a leg up on international markets.
Monica Trauzzi: Does Ryan handle this better in his proposal?
Pete Sepp: Well, the Ryan proposal deals with tax reform using several basic principles. Now, he doesn't get too far into the specifics of what would be in and what would be out of a tax system under his reform plan. We assume that if he were to go for rate reductions in the corporate tax, which is something he's expressed a desire to do, then perhaps some of the other credits and deductions might be pared back or phased out. That may be a worthwhile approach, we'd have to see the details. But what President Obama is proposing to do is basically take away various tax provisions, but only for oil and gas, making the system more complex, adding to their burdens and raising prices for consumers. That's not really tax reform.
Monica Trauzzi: So then is it more just a good talking point?
Pete Sepp: Yeah, I'm afraid it is. And not only is it just a talking point, it's also a very serious threat to our future competitiveness abroad.
Monica Trauzzi: OK, so than what's your recommendation of how they should handle that issue?
Pete Sepp: Well, if we're going to do tax reform and we're going to look at things like the dual capacity credit, we have to do it systemically. We have to recognize that the whole U.S. system of taxing companies earnings abroad is outmoded. We're one of the only countries on Earth that practices this system. We have to lower rates across the board and, when we look at the spending side, we have to be fair to all forms of energy. There's an interesting proposal from Congressman Devin Nunez called the energy roadmap. And what that would do for alternative sources in the future is create a reverse auction process. Meaning if we get rid of this permitorium that's been existing on offshore and other forms of oil and gas exploration, the revenues start coming in by the increased development, those go into a trust fund. And, at that point, alternative energy sources would bid for the privilege of being able to develop technologies, to get federal grants for them, and they would be judged based on price per megawatt of power that they produce. A very novel approach, because until that legislation came out it had basically been a bunch of political favor trading in billions of dollars.
Monica Trauzzi: So how does each proposal handle energy security? Do they improve our domestic security here at home?
Pete Sepp: Certainly the Obama budget doesn't really do much good in that area. In fact, it could very well worsen our energy security when we're looking at places like West Africa, for example, which is where the U.S. will get roughly a quarter of its oil developments over the next several years. Well, if we get rid of the so-called dual capacity tax credit, that means our companies operating there, working with firms on the ground, producing income, will get taxed twice on the same earnings. That's not going to be much of an inducement for our companies to remain there, much less remain profitable there. Now, the Ryan budget talks about easing some of the restrictions on our own domestic energy development in oil and gas. We think that's a good approach. And if you combined it with other things, we would have I think a pro-taxpayer, pro-market energy policy.
Monica Trauzzi: So where do you think the biggest battle lines are going to be drawn during the budget debate?
Pete Sepp: First and foremost, the question will remain are we going to start doing the political favor trading again, picking winners and losers through the tax code by saying everyone can get this tax credit except oil and gas? That's going to be the Obama administration's position. We think that if tax reform is to be approached logically and with fairness to all, we have to abandon that punitive approach.
Monica Trauzzi: But isn't it about leveling the playing field?
Pete Sepp: Well, leveling the playing field means that everyone gets treated fairly. It doesn't mean saying that we acknowledge that the U.S. tax code is broken and we're going to fix it, but oil and gas companies won't be allowed any kind of benefit from this process. That's not leveling the playing field.
Monica Trauzzi: They have benefited for decades though.
Pete Sepp: Well, what they have done is they've taken the opportunity to use tax policies that are available to lots of companies outside of oil and gas. And goodness knows, there are subsidies involved in the spending side that need to be addressed and we got together with U.S. Public Interest Research Group last year to come up with several hundred billion dollars worth of spending reductions. One of our recommendations was let's get rid of the $158 million deepwater oil and gas exploration program. The companies should be able to handle that themselves. We also need to take a look at loan subsidies and mandates, $50 billion worth of nuclear energy loan guarantees, very risky for taxpayers. So, again, we need to take a holistic approach here.
Monica Trauzzi: Energy research and infrastructure, this is something that President Obama has indicated he wants to push for in the next budget. Is that something you think is fair?
Pete Sepp: Energy research and infrastructure can be very important to our economy. But, again, I think that the roadmap approach where it is a much more competitive process focused on practical development of energy generating technologies rather than simply showering billions of dollars on politically powerful constituencies, like ethanol.
Monica Trauzzi: OK, we'll end it right there. Thank you for coming on the show. Nice to see you.
Pete Sepp: My pleasure.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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