New taxes would harm fragile US economy, economists agree

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Sept. 28 -- The sluggish recovery from the deepest recession in decades has left the US economy so fragile that new taxes could severely damage it, chief economists from the American Petroleum Institute, National Association of Manufacturers, and National Association of Home Builders warned.

Uncertainty about possible new taxes and emerging regulations are constraining business investments, while consumers are deferring spending wherever possible, they said.

New oil and gas taxes that the White House proposed in its fiscal 2011 budget request, and reduced domestic production because of the deepwater drilling moratorium would effectively be act as a “one-two punch” to the US oil and gas industry, API’s John C. Felmy suggested during a Sept. 28 briefing at API’s headquarters.

Felmy said gasoline demand during 2010’s June-August summer driving season averaged 9.22 million b/d, 0.25% less than the comparable 2009 period but 1% more than the same 3 months in 2008. Ultralow-sulfur diesel deliveries, which are a general US economic indicator because they reflect the movement of goods on the nation’s highways, averaged nearly 2.9 million b/d during August, down 0.1% year-to-year, API’s latest monthly statistics showed.

“The lower summer driving demand shows a lack of consumer confidence,” Felmy told reporters. “The August downtick in [ULSD] indicates lower demand for goods. Now is not the time to increase taxes and business costs.”

‘In low gear’
NAM’s David Huether said that a double-dip recession appears unlikely, but added that the US economy could be stuck in low gear for the rest of 2010 now that the Obama administration’s economic stimulus measures have ended. Gross domestic product could reach pre-recessionary levels sometime next year, which would make the recovery one of the longest in US history, he said.

He noted that the nation’s manufacturers have begun to create jobs again, adding 145,000 positions in 2010’s first 8 months to the 11.27 million people they employ directly. US manufacturers remain more efficient than their foreign competitors, but also face higher operating costs, he said, and business uncertainty and consumer caution remain underlying concerns. “The last thing government should do is add costs, either with taxes or new regulations,” Huether said.

“This will be a slow recovery,” predicted NAHB’s David Crowe. Housing, which has led the general domestic economy out of previous recessions, isn’t doing so this time despite lower prices and interest rates making housing more affordable, he said. There’s also significant pent-up demand from roughly 800,000 unformed households as many children live longer with their parents and students who stay in school longer remain on campus in dormitories, he added.

“Consumers just don’t feel confident,” he said. “They’re not ready to buy new homes and aren’t certain they would be able to sell the ones they’re living in now. Banking regulators have been unwilling to differentiate bad housing markets from good ones. If single-family housing was back to where it should be, we’d have 3 million more jobs, half of them in construction.”

Proposed federal tax increases would disproportionate hurt small businesses, the three economists agreed. Among manufacturers, they would be felt most in limited liability corporations and Subchapter S corporations that face competition from overseas, Huether said. Felmy said new taxes would hit 11,000 firms, each with 500 or fewer employees, that cumulatively provide 120,000 jobs. “We can’t afford to withdraw that kind of money from the economy when it is so fragile,” said Crowe.

Contact Nick Snow at

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