Democrats want to use the tax code to punish oil companies, but the Congressional Research Service reported two months ago that tax hikes on oil producers would backfire on consumers instead.  Instead of using the revenue to fund “green energy” initiatives, as Barack Obama wants, Democrats are hoping to use the revenue for deficit reduction as a way to pin Republicans against the wall:

It’s official: Democrats will deviate from Max Baucus’s blueprint for the bill that would have used the new tax to fund initiatives intended to reduce oil consumption. Instead, Democrats are proposing to put the approximately $4 billion annually toward balancing the budget and daring their Republican colleagues to vote against deficit reduction.

This has to be a joke, right?  Four billion dollars in additional revenue — a questionable claim, as we’ll see in a minute — will reduce this year’s deficit by exactly 0.25%.  It’s not even a full month’s interest on one year’s deficit.  While any deficit reduction helps, the real problem in deficits is spending, not revenue.

But as the CRS report shows, the tax changes proposed are difficult to project for revenues anyway.  Most of the tax breaks listed are simply ways to allow oil companies to declare costs as most other businesses do.  Many don’t even come into play until oil prices drop below a certain floor anyway.  For instance, the Enhanced Oil Recovery Credit hasn’t even been an issue for several years, since it only applies when oil prices are so low that they discourage more expensive production.    The same is true for costs associated with marginal wells.  Repealing the tax break for “intangible drilling costs” would only impact independent producers, not the larger oil companies, and so on.

Plus, the effect of repealing other methods of declaring costs will mean less exploration and production, not higher revenues.  Democrats appear to be using static tax analysis to reckon that their action would generate $4 billion in annual revenue.  What will happen is that oil companies will change their behavior to reduce their tax liabilities, and that will mean lower production and higher prices.

The CRS concluded in March that the consumers would end up getting the shaft for Democratic populism, and would leave us more dependent than ever on imports:

The Obama Administration, in the FY2012 budget proposal, seeks to eliminate certain tax expenditures that benefit the oil and natural gas industries. Supporters of these tax provisions see them as comparable to those affecting other industries and supporting the production of domestic oil and natural gas resources.  Opponents of the provisions see these tax provisions as subsidies for a profitable industry the government can ill afford, and impediments to the development ofclean energy alternatives.

The FY2012 budget proposal outlines a set of proposals, framed in terms of deficit reduction, or termination of tax preferences, that would potentially increase the taxes on the oil and natural gas industries, especially those of the independent producers. These proposals include repeal of the enhanced oil recovery and marginal well tax credits, repeal of the current expensing of intangible drilling costs, repeal of the deduction for tertiary injectants, repeal of the passive loss exception for working interests in oil and natural gas properties, elimination of the manufacturing tax deduction for oil and natural gas companies, increasing the amortization period for certain exploration expenses, and repeal of the percentage depletion allowance for independent oil and natural gas producers. In addition, a variety of increased inspection fees and other charges that generate more revenue for the Department of the Interior are included in the budget proposal.

The Administration estimates that the tax changes outlined in the budget proposal would provide $22.8 billion in revenues over the period 2012 to 2016, and over $43.6 billion from 2012 to 2021. These changes, if enacted by Congress, also would reduce the tax advantage enjoyed by independent oil and natural gas companies over the major oil companies. On what would likely be a small scale, the proposals also would make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence.

We should be looking for ways to encourage domestic production, or at least not to discourage it.