Sunday, April 23, 2006

A provision attached to the Budget Reconciliation Bill (H.R. 4297) being debated in Congress would make it harder for U.S. oil producers to compete in the global marketplace. It’s not the windfall profits tax — a large bipartisan majority in both the House and Senate defeated that misguided attempt to “punish” oil companies for price increases brought about by high global demand and shrinking world supplies. But this latest effort to eliminate the foreign tax credit would have a similar outcome: a heavier economic burden on American oil producers to meet our energy demands, and a competitive disadvantage with the rest of the world.

If the foreign tax credit is eliminated, U.S. oil companies will be subject to double taxation on oil produced in other countries. Many oil and gas companies have overseas operations and pay foreign countries for the rights to operate on foreign soil. But it is sometimes questioned whether such payments are income taxes or royalties for the right to extract oil. The foreign-tax-credit change would deny credits for amounts paid by a large integrated oil company to a foreign jurisdiction if they receive an economic benefit from the foreign jurisdiction (such as the right to extract oil) or are not subject to an income tax.

Eliminating the foreign-tax credit does nothing more than grant a subsidy to the foreign oil producers against which U.S. firms must compete. History and the laws of economics have taught us that under such circumstances, the ability of U.S. companies to compete in world markets is greatly diminished.

Overtaxing legitimate profits of U.S. energy companies depletes funds for exploration and new production that help meet more of our energy needs without increased imports. Reducing the U.S. companies’ incentive to produce more oil is the opposite of what we should be doing.

The free market must be allowed to control oil prices and production, and American oil companies must be able to compete in that free market. Saddling them with an inordinate tax burden removes that ability and with it our national capacity to control our own energy destiny.

The more expensive U.S. produced oil becomes, the more lower-priced foreign oil we will import and consume. It’s hard to believe anyone thinks that’s in our best national interest.

For more than 90 years, the National Foreign Trade Council has strongly supported an open world trading system. Today, America’s role in this system is more important than ever.

Ill-advised policies such as ending the Foreign Tax Credit for the oil and gas industry reduce world competitiveness and put our future in the hands of other nations. Let’s hope the Budget Bill conferees realize this and remove the proposal from the finished legislation.

William Reinsch is president of the National Foreign Trade Council. He is a former Commerce Department undersecretary for export administration.

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