Full Text: Shell Oil's Statement At Senate Energy Panel Hearing.

February 24, 1993

Shell Oil Company applauds the President and the Congress for providing leadership is addressing the problems created by the federal budget deficit. Shell believes that the deficit hampers the long-term economic health of our country, and we are willing to do our fair share to contribute to the solution of the problems identified by the President and the Congress.

The primary means of deficit reduction must be spending restraint, aimed at both discretionary spending and entitlement programs whose growth has been largely unconstrained. If additional substantial revenues are needed, they should be raised by a broad- based consumption tax, such as a credit-style value-added tax, which will not penalize capital investment and is aimed at encouraging savings and improving the U.S. economic position.

A broad-based energy tax does not meet these criteria. Before addressing the ADVANTAGES of a credit-style VAT, it is important to point out the DISADVANTAGES of an energy tax.

Whether a tax on the energy content of fuels, such as the BTU tax being considered, or a tax on the value of fuels, an energy tax raises the price of not only energy but of all manufactured goods. This results in a loss of competitiveness for U.S. manufactured goods in world markets and the possibility of renewed inflation.

An industry-specific tax distorts resource allocation among industry sectors and adversely affects U.S. economic growth, employment, investment and the international trade balance in industry sectors.

o Any form of new or increased taxes will impair economic growth

o Industry-specific taxes can disadvantage U.S.-based

o Attempts to make these taxes trade-neutral by exempting

o Industry-specific taxes can disadvantage U.S.-based production

o Nor can industry-specific taxes be economically neutral. By

Specifically, the BTU tax being discussed is heavily weighted against oil, which under almost any circumstance is destined to be the backbone of the U.S. economy for a long time to come. It will not discourage imports because imports are not the marginal fuel.

However, it threatens two areas of high domestic resource potential --- the deepwater Gulf of Mexico and enhanced oil recovery, particularly heavy oil. Both the deepwater Gulf of Mexico and heavy oil are high cost domestic arenas. The proposed BTU tax would only encourage companies to invest in foreign countries rather than investing in the U. S. in areas of high cost, high resource potential.

It is ironic that, at a time when preservation of American jobs and reduction of crude oil imports are of primary importance, the government is threatening to impose a tax burden on the deepwater Gulf of Mexico, the only remaining area of high resource potential open for exploration and production in this country today. The Congress and the Administration should consider the following facts:

o THE DEEP WATER POTENTIAL IS SIGNIFICANT. Only 5 percent of

o DEEPWATER PROJECTS REQUIRE LARGE EXPLORATION, DELINEATION, AND

o THE ADDITIONAL TAX BURDEN MAKES THE DEEPWATER GULF OF MEXICO

o THE DEEPWATER CONTAINS BOTH OIL AND GAS. The deepwater has

o As Senator Johnston indicated in his February 4, 1993 comment

o ENCOURAGING DEVELOPMENT OF THE DEEPWATER GULF OF MEXICO WILL

The case of heavy oil holds special ironies as well. In today's market, heavy oil is economically disadvantaged. The proposed BTU tax would further disadvantage heavy oil. The Congress and the Administration should carefully consider the following facts:

o IN ADDITION TO THE BTU TAX ON THE OIL ITSELF, HEAVY OIL WOULD

o HEAVY OIL IS THE MOST PRICE RESPONSIVE SOURCE OF FUTURE

o IN TODAY'S MARKET, HEAVY OIL IS DISADVANTAGED VIS-A-VIS OTHER

o HEAVY OIL IS A SIGNIFICANT DOMESTIC RESOURCE. Known heavy oil

Shell's heavy oil production is concentrated in California,

If a broad-based energy tax has all of these disadvantages, how can the revenue be raised to address deficit reduction, an important requirement for the future economic health of this country? Shell believes the preferred solution is a broad value added tax constructed along the lines of a credit-method VAT.

The VAT is a general tax on the expenditures for the consumption of goods and services. The collection of the tax is achieved through a system where each business purchaser and seller of goods and services pays taxes on the value of goods and services bought and collects and remits tax on the value of the goods or services sold. To avoid paying taxes on taxes, the seller gets a credit for the taxes on purchases.

From an economic standpoint, a separately stated VAT on the sale of most goods and services is the least damaging way of raising revenue since it falls evenly across the economy and does not burden capital outlays. Further, imports of manufactured goods can be taxed and exports exempted, avoiding the anticompetitive effects of the energy tax.

Nor does a separately-stated VAT discriminate against U.S. industry either in the U.S. or abroad. The credit approach helps assure this by providing businesses almost immediate credit for any VAT paid, tax exemption of exports and taxation of imports. There is no un-rebated, imbedded tax cost in American goods sold here or abroad. American goods maintain their relative positions in U.S. and foreign markets.

Additionally, a VAT levied at the same rate on all goods and services would not cause a significant distortion of consumer choices. The relative costs of goods and services would be the same after imposition of the VAT as before.

While a fiscal goal should be a uniform tax applied to as broad a base of consumption as possible, a federal value-added tax will inevitably be met with suggestions for exemptions and multiple rates. A credit method can best handle such circumstances. A credit method VAT also appears to provide the best method for businesses to recover the taxes paid on purchases. A subtraction-style VAT presents the same problems as does the broad-based energy tax as to the difficulties of a business trying to recover its higher costs in the marketplace.

A VAT has a very large potential for revenue and can raise large sums at very low rates. For example, the Congressional Budget Office estimated last year that a VAT of only 1 PERCENT could raise between $15 billion and $30 billion per year, depending upon exemptions for food, housing and medical costs. Any negative regressive effects can be further mitigated by such mechanisms as the earned-income credit and low-income programs. The benefits of a VAT are numerous, and have been treated in many studies. A VAT is fairer to the economy and to U.S. business and industry both here and abroad. It is a better alternative.

Shell remains ready to work with the Administration and the Congress to address the federal budget deficit without hampering the long-term economic health of the country.