Much Ado About Gas Prices (Updated)
Oil prices are up again, and politicians from both sides are doing their best to assuage public anxiety by pretending they can “do something” about it. Liberal politicians are attacking the alleged special tax treatment of the oil industry and forming taxpayer-funded enforcement groups to look, aimlessly, for price gouging or other oil market manipulation. Conservative politicians are strongly implying -- at times declaring -- that increasing domestic oil production in the United States will have noticeable effects on the price consumers pay at the pump.
Now, don’t get me wrong: expanding oil production in the United States is a terrific idea, and policies or regulations that prevent domestic production should be retired. Our nation, still burdened by an unemployment rate of 9 percent, will benefit from increased economic activity. Tax royalties from the oil industry will provide much-needed government revenue. And what’s the point of having natural resources if we leave them sitting in the ground? Increased production, however, isn’t going to have a significant impact on the price of gasoline in the short term. In the long run, its effect will still be small.
As for the oil “subsidies,” there are a few unique oil tax credits -- which, if you truly believe in free markets, should be repealed. However, these subsidies aren’t the “subsidies” being discussed in the media. The primary tax credit on the chopping block is the domestic manufacturer’s tax credit, available to a wide variety of industries. The alternative to this tax credit is having more companies flee the United States in search of countries with saner corporate tax rates. The U.S. corporate tax rate, by some measures, is the largest in the developed world.
Our high corporate tax rates are the reason these tax credits exist. Historically, it has been easier to enact these tax credits than to pass overall tax reform. The Democratic leadership has singled out the oil industry -- intending to leave the manufacturer’s tax credit intact for other industries, lest they feel the wrath of unionized industries loyal to them. Environmentalists, of course, are uniquely thrilled. (They actually want higher gas prices.)