Congress Divided Over Whom to Tax, How to Use Funds : Oil-Import Fee Issue Sparks Rift in Industry

Last summer, three influential senators from the nation’s major energy-producing region made a pilgrimage to the White House in an effort to persuade top Reagan Administration officials to support an oil-import fee that would both help protect the struggling domestic oil industry and arrest a worrisome slide in revenues in their home states.

The senators--Democrats David L. Boren of Oklahoma, Russell B. Long of Louisiana and Lloyd Bentsen of Texas--went away empty handed, but White House Chief of Staff Donald T. Regan offered some parting advice:

“Come back,” Regan said, “if the price of oil falls to $20 a barrel.”

Today, with some oil prices plunging below $15 a barrel, they are back--and this time the White House is listening.

Blessed earlier this month by President Reagan as virtually the only new source of revenue he will consider, the idea of imposing an oil-import tax is being taken more seriously than ever.

But supporters of an oil-import fee probably will not be able to overcome some deadly political flaws. Although the proposal would boost depressed domestic oil and gas drilling operations by providing a floor under U.S. prices, for example, it has split the oil industry into rival camps.

At the same time, fierce opposition from the import-dependent Northeast, combined with Senate infighting over how the relatively limited revenues from such a fee should be used, are likely to sound its death knell. As a result, the way could be opened for a broader energy tax or a higher gasoline tax--which, ironically, would exacerbate the problems of the groups that backed the original idea of a tax on imported oil.

“The oil-import fee is like opening Pandora’s box,” argued Harold B. Scoggins Jr. of the Independent Petroleum Assn. of America, the Washington lobbying arm for many independent oil-drilling firms. “It looks great at first glance, but we don’t have the clout to get it, and all it does is turn the attention of Congress to the idea of raising taxes on the industry.”

Despite these fears, a tax on imported oil of up to $10 per barrel is being championed this year as the solution to a host of knotty problems, from meeting Gramm-Rudman deficit-reduction targets, to allowing Reagan’s tax-overhaul plan to retain crucial tax breaks for businesses, to preventing the collapse of some Southwestern banks because of sour energy loans.

Supporters include highly placed Texans in the Administration such as Vice President George Bush and Treasury Secretary James A. Baker III, as well as Senate Majority Leader Bob Dole (R-Kan.) and other key lawmakers.

With oil prices in a steep decline, lawmakers have turned their attention to the oil-import fee and other energy taxes as the least painful way to raise revenues. A Senate Finance subcommittee is scheduled to hold two days of hearings this week on the issue in an effort to broaden support for the fee.

“An energy tax is appealing to Congress because it looks like it wouldn’t hurt,” said Joseph Minarik, a tax analyst at the Urban Institute, a nonprofit Washington think tank. “You can argue that the tax wouldn’t mean higher prices, but would simply keep them where they were.”

Backers of the oil-import fee present several arguments on its behalf, but they all boil down to the need to sustain domestic oil and gas drilling to prevent the United States from growing overly dependent on foreign oil.

“I’ve been warning for more than two years that the domestic industry was in danger of being driven to the wall, and now it’s coming true,” said Houston oil magnate George P. Mitchell, head of the one of the largest independent oil companies in the nation.

“(Saudi Arabian Oil Minister Sheik Ahmed Zaki) Yamani wants to break the back of (U.S.) frontier exploration so he can recapture control of the energy market five years down the road,” Mitchell warned. “If we don’t respond with an oil-import fee, I’m afraid he’ll get away with it.”

Advocates of a tax on imported oil also point to the alarming plunge in U.S. drilling for oil and gas--which has fallen from a high of about 4,000 drilling rigs in the field in 1981 to fewer than 1,400 recently--and contend that it is the only way to stabilize an industry they insist is crucial for national security.

“We have to focus on the long-term benefits of retaining a strong domestic oil and gas industry,” Boren, a senior member of the tax-writing Finance Committee, said. “The exploration budgets of the majors are being slashed; the drilling supply companies are in bad shape, and the independents are shutting down their marginal properties.

“If the price stays depressed long enough,” Boren asked, “how will we respond when the Saudis once again decide it is time to raise prices?”

Could Boost Prices

Indeed, if an oil-import tax is imposed, domestic producers would be able to boost their prices, too, providing additional profits and an incentive to maintain expensive drilling operations.

Advocates argue that unless the U.S. industry begins drilling now, primarily for deep pockets of natural gas, the nation is in danger of being caught short of energy supplies once again when the oil glut has dissipated.

However, Treasury Department officials are even more worried at the moment about the threat to Texas banks, which poured billions of dollars into domestic energy loans during the heady years of the late 1970s and early 1980s, when the conventional wisdom held that the price of oil per barrel would inevitably rise to $50, $60, or more.

Now that the market price of oil has collapsed, the collateral for those energy loans is disappearing as well.

“There’s about $160 billion in debt out there that is based on oil and gas in the ground,” said one Treasury official, who spoke on the condition that he not be identified. “There’s a real danger that some big regional banks could find themselves under water if we don’t do something.”

Threat to Budgets

At the same time, states such as Texas and Louisiana, which derive much of their revenue from royalty fees on energy production, are faced with the grim dilemma of either slashing government services or boosting taxes from other sources.

Although these arguments may be compelling to representatives from energy-producing states, other lawmakers have been attracted to the oil-import tax for a more prosaic reason: They need the money.

An $8-a-barrel oil-import tax would raise $81.4 billion over the next five years, according to Treasury estimates. If the world market price for oil settled at about $20, the tax could boost oil product prices for consumers by as much as 20% and raise gasoline prices at the pump by about 19 cents a gallon.

Adding a tax on half of the windfall profits that domestic producers accrue from those higher prices would boost the total to $96.2 billion over the same period.

The Reagan Administration has cracked open the door for using that revenue--or the $92 billion that could be raised by boosting the 9-cent-a-gallon federal gasoline tax by 21 cents--so long as it remains part of a tax-overhaul package that would not increase the overall tax burden.

Senate Finance Committee Chairman Bob Packwood (R-Ore.), who has not yet begun to draft a Senate version of the House-passed tax-revision bill, wants to take advantage of that opening to retain some business tax preferences that were slashed in the House plan and to lower tax rates below the levels agreed upon in the House Ways and Means Committee.

Reduce Deficits

But other Senate leaders want to apply any revenues from new energy taxes to narrowing the budget deficit. The money from an oil-import fee, observed one of them, Senate Budget Committee Chairman Pete V. Domenici (R-N.M.), “can’t be used twice.”

An energy tax, he said earlier this month, “may be the glue that would put together a major (deficit reduction) package.”

Although both Packwood and Domenici are pulling on the oil-import fee like taffy, it will not stretch far enough to satisfy each of their needs--and that has widened the interest in a broader energy tax.

A relatively modest tax of just 6% of the value of all energy products would raise more than $100 billion over five years and would have far less impact on any specific sector of the economy.

“If Congress starts looking seriously at the oil-import fee as a way to raise revenues,” said Norman Ornstein, a political analyst at the American Enterprise Institute, a Washington think tank, “members will quickly realize that there is a lot more money in taxing domestic energy, too. They are not going to leave the U.S. industry alone.”

Last week Federal Reserve Board Chairman Paul A. Volcker also came out against an oil-import fee, arguing that any energy tax aimed at raising revenues to reduce the budget deficit should include both domestic and foreign oil.

Pressure to Exempt

Volcker also noted that there would be a great deal of pressure to exempt from any import fee Canada and debt-burdened Mexico, further reducing its revenue-raising ability.

Indeed, any relatively narrow energy tax--whether an oil-import fee or a higher gasoline tax--seems certain to ignite a bitter regional conflict.

“We won’t sit still for a tax that would make us pay more to bail out the oil industry,” said Sen. John Heinz, a Republican from the heavily industrial state of Pennsylvania. “Why tax imported oil? Why not tax imported steel?”

Sen. Claiborne Pell (D-R.I.) has already introduced a resolution, initially sponsored by 13 senators from the Northeast, opposing an oil-import tax.

A gasoline tax divides the nation along similar regional lines, only in reverse. Although probably acceptable to many lawmakers in the Northeast--particularly if it were used to finance repairs of decaying bridges, roads and mass transit systems--it would set off smoke signals in the West and Southwest, where cars are used to cover longer distances and the 55 m.p.h. speed limit is an unpopular symbol of federal meddling in driving freedom.

California Rep. Anthony C. Beilenson (D-Los Angeles) has recently introduced a proposal to keep gasoline prices at the same level as the beginning of the year by raising the gasoline tax at the same rate that the price of oil falls. If oil prices settle at about $17 a barrel, the gasoline taxes would boost prices at the pump by an estimated 24 cents a gallon.

Expects Opposition

Beilenson, who called it “the most pain-free way of raising the revenues we need to bring the deficit down,” nonetheless conceded, “I’m not counting on people embracing this idea. Nobody likes the idea of higher taxes.”

Despite all the obstacles, however, the clamor for each faction’s favorite type of energy tax will not disappear, particularly from those tied to the industry’s fortunes.

“People are panicky down in Houston, Dallas and Tulsa--that’s what’s keeping the oil-import fee alive,” one oil industry lobbyist said. “I wonder if they realize just how easily all this can backfire.”