Deficit Reduction Through Energy Development

The new report from Joseph Mason, “Beyond the Congressional Budget Office,” explores the various ways that the CBO’s recent estimates vastly understate the economic activity and tax receipts that would be generated if the federal government merely got out of the way of the development of domestic oil and gas resources. In the present post, I’ll summarize some of Mason’s key findings, and then relate them to other proposals for easing the federal budget crunch. As we’ll see, relaxing federal restrictions on domestic energy development should be a no-brainer, if one wants to help the unemployed and reduce the deficit with no pain to taxpayers.

Mason: Why the CBO Got It Wrong

First we should put the Mason study in the context of the ongoing debate over U.S. energy policy. At a time when the federal budget is running up trillion-dollar-plus deficits year after year, oil prices are high, and millions of Americans are out of work, one would think that opening up federal lands to further oil and gas development would be an obvious policy solution that would ease each of these problems.

Yet in August 2012, the Congressional Budget Office (CBO) released an analysis projecting that opening up ANWR and “most” other federal lands to leasing wouldn’t bring in significant amounts of additional federal revenue over the next decade. Among the reasons they cited for the delay in revenues was a lag in bringing new production on-line due to permitting and other delays, things the government has only made worse. Even extending the time horizon, CBO projected gross proceeds from opening up ANWR of only $2 to $4 billion per year during the period 2023-2035. Of course, even these numbers are nothing to sneeze at, but in light of environmental and other concerns, the CBO figures appear relatively modest in the grand scheme.

Enter the Mason study. Mason argues that the CBO analysis vastly understates the potential economic and government revenue impacts of allowing expanded access to federal lands. For one thing, the CBO study only looks at the revenue derived explicitly from leases, royalties, and bonus payments paid by private companies to federal and state governments. Mason instead uses standard economic modeling to estimate the economy-wide impact of increased access. In particular, the federal government will see an increase in tax collections not simply because of explicit lease and royalty payments, but also because of higher incomes in a stronger economy. Furthermore, state and local governments will also see increased tax receipts from new activity and the creation of new wealth

There are other weaknesses of the CBO estimate. Mason points out that it relies on oil and gas price estimates that are lower than those used by other agencies, such as the World Energy Outlook. Further, CBO relies on estimates of oil and gas reserves that were made decades ago. It is well known that with refined exploration techniques and equipment, reserve estimates are usually adjusted upward, as the following chart from the Mason study illustrates:

The chart above shows how the reserve estimates of oil (green, left side) and natural gas (red, right side) in the Gulf of Mexico Outer Continental Shelf (OCS) increased significantly from 1996 through 2011. We can expect the same pattern to hold in other federal lands, if only private companies were given the green light to start looking.

Having said all this, we should be clear that the Mason study did not tweak the CBO’s assumptions of oil and gas prices, or of reserves on federal lands. Mason retained those assumptions, to get an apples-to-apples comparison to isolate the effects of incorporating all of the economic activity from expanded access. In other words, the only change Mason made, was to go beyond the explicit lease and royalty payments, to include additional tax receipts generated by greater economic activity. His point in mentioning the other drawbacks of the CBO analysis, is to show that even Mason’s estimates remain conservative.

Tax Receipts From Expanded Access: Mason vs. CBO

The CBO analysis estimates only very modest increases in federal receipts from opening up ANWR and select other portions of the OCS to development, working out to a combined total of about $700 million annually during the first decade ($500 million due to ANWR and $200 million to OCS). Further, those gross lease revenues wouldn’t accrue entirely to the federal government, as some would have to be shared with the Alaskan and other state governments.

However, Mason’s analysis indicates a much larger figure, because he includes the increase in revenues due to expanded economic activity. In other words, the federal government (for example) would see increased revenues not merely because of explicit lease payments, but also because of higher incomes.

Using standard economic modeling of such “feedback” effects, Mason estimates that in the “short run” (defined here as 7 years), the federal government could expect an annual boost in tax receipts from expanded economic activity of $24.1 billion.

Comparing the “Mason Plan” With Other Deficit Proposals

To appreciate just how much an extra $24.1 billion per year in federal tax receipts would be, let’s compare this number to other proposals out there. For example, on these pages I’ve already shown that the much-ballyhooed “fiscal cliff” actually would have involved a mere $9 billion cut in the absolute level of federal spending for a single year, before returning to a permanently increasing level of spending.

What about those “tax loopholes for Big Oil” that we often hear about? According to the White House’s FY2013 budget proposal (see pages 221-236), the three biggest suggested changes involve repeal of the manufacturing deduction for oil and gas companies ($11.6 bn over ten years), repeal of the percentage depletion allowance for oil and gas wells ($11.5 bn), and repeal of expensing of “intangible drilling costs” ($13.9 bn). IER President Thomas Pyle has explained why these really aren’t “tax loopholes” and why they aren’t at all about “Big Oil,” but for our purposes here, let’s just look at the total figures: They add up to a total of $37 billion over ten years in extra revenue for the federal government, according to the White House analysts. Of course, that means on average they would only bring in $3.7 billion per year, in the short run.

Recall that the Mason study estimates an immediate boost to federal tax receipts of $24.1 billion per year from expanded economic activity. Thus, giving energy companies more freedom to develop domestic resources, would bring in six and a half times as much extra revenue as jacking up taxes on energy companies.

Conclusion

The new report by Joseph Mason provides estimates of increased job creation and economic activity that would result from increased access to federal lands. In this blog post, I have looked at just one element of the Mason study. Namely, I showed how his estimate of increased federal tax receipts in the short run, is six and a half times higher than what the White House projected it would collect by “closing tax loopholes” on oil and gas companies.

There is no hocus pocus involved here. At a time with millions of people out of work, there are “free lunches” available in the sense that relaxing federal restrictions can instantly render workers employable. The extra revenue that the federal (and other) government would collect on this new economic activity would not come as a cost, because that is economic activity that otherwise would not have existed.  As President Obama said on February 19, “nothing shrinks the deficit faster than a growing economy that creates good, middle-class jobs.  That should be our driving focus — making America a magnet for good jobs.”

In contrast, proposals to explicitly hike tax rates on either individuals or businesses really will depress the economy, and further burden taxpayers. If the goals are to increase employment, reduce energy prices, and reduce the federal budget deficit as painlessly as possible, then reducing federal restrictions on domestic energy development is an obvious policy solution.

Author: Robert Murphy