Pelosi's Poison Pill

In a Saturday radio address, Nancy Pelosi appeared to buckle to overwhelming popular support to lift the ban on offshore drilling.

Pelosi said the Democrats' plan "will consider opening portions of the Outer Continental Shelf for drilling, with appropriate safeguards, and without taxpayer subsidies for Big Oil."

On the surface, that seems like great news for American consumers and the economy.  Unfortunately, the plan is larded up with other provisions that make it wholly unpalatable.

Her priorities include a repeal of royalty relief for offshore drillers and an end to other tax credits for the biggest oil companies, as well as so-called use it or lose it legislation forcing energy companies to relinquish un-used leases.

Among the "other tax credits" Pelosi's targeting is the tax break that enables all manufacturing companies to deduct 6% of their qualifying income.  The American Jobs Creation Act of 2004, which included this tax relief, takes a very broad view of what qualifies as manufacturing.  In addition to traditional manufacturers, the act covers companies and individuals engaged in engineering, architecture, software development, lavish Hollywood blockbusters, and yes, the production of electricity, natural gas, water, etc.

Stripping this tax break from specific industries, based on nothing more than their unpopularity, is no more sensible than (and substantively indistinct from) the imposition of the Carter-style "windfall profit" taxes that candidate Obama so favors.

And the end result would be just as foreseeable and inevitable.  When you punish an activity by introducing an incremental financial disincentive to engage in it, you'll swiftly see the corresponding market response.  Less capital will flow into energy exploration and refinement, supply will be constrained, and prices will rise.  Those causal linkages aren't matters of partisan debate; they're simple and incontrovertible matters of economics.

Still, as much recognition as Pelosi deserves for championing illogical policies for their own sake, I suspect the inclusion of these punitive measures in her new "plan" serves a simpler purpose.  Namely, to make whatever "comprehensive" bill might emerge so unattractive that it will lose the bipartisan support enjoyed by the singular matter of whether or not to permit offshore drilling.

If her House colleagues lose their appetite for expanding domestic production when it requires swallowing Pelosi's fetid tax penalties, she can then demagogue the issue further, insisting Republicans' desire to expand production paled in comparison to their desire to protect the evil oil industry.  And it saves her the embarrassment of handing a victory to the insolent minority party on such a wildly popular measure.