Crude Economics: Windfall Profits Taxes Hurt Consumers at the Pump

 
 
April 29, 2006

(The following article originally appeared in the April 29, 2006 edition of the Los Angeles Times.)

As gas prices top $3 per gallon, politicians are cashing in big — by throwing bombs at the U.S. oil industry.

As in every crisis, Washington is suffering from a predictable case of "do something" disease. Products of the ready-to-eat microwave culture, Americans want an instant solution to high energy costs, and this lends itself to grandstanding and election-year maneuvering by politicians of all stripes.

Numerous lawmakers, from Senate Minority Leader Harry Reid (D-Nev.) to Sen. Arlen Specter (R-Pa.), are lining up to support a new federal windfall profits tax, with the aim of redistributing profits from "greedy" oil companies.

But lawmakers could benefit from a history lesson. The last time this country experimented with such a tax was the Crude Oil Windfall Profit Tax Act of 1980. According to a 1990 Congressional Research Service study, the tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted. It stunted domestic production of oil by 3% to 6% and created a surge in foreign imports, from 8% to 16%.

Politicians calling oil companies "greedy" is more than a little ironic. Tax Foundation studies have shown that state and federal treasuries profit handsomely from oil industry sales. The average American motorist pays taxes of 46 cents a gallon on gasoline, of which 18.4 cents a gallon goes to the federal government. States and localities pocket the rest.

The nation's energy companies are already providing a "windfall" of taxes. According to Department of Energy data, from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today's dollars, that's $2.2 trillion — enough to buy a Toyota Prius for every household in the nation.

In fact, oil companies have paid in taxes more than three times what they earned in profits during those 28 years.

As the oil industry brings in record profits, it also pays record taxes that average 39% worldwide, even after accounting for special deductions and credits. That compares with a 33% average tax rate for other industries.

In 2005, Chevron, ConocoPhillips and Exxon Mobil paid more than $158 billion in total worldwide taxes. This gargantuan tax bill nearly equals the entire economic output of Iran and surpasses the total gross domestic product of 150 of the 184 countries ranked by the World Bank.

It would be unfair and absurd to tax workers at different rates, based merely on the industry they work in. Similarly, it makes no sense to tax an industry punitively based on the volatility of its profits. Oil will always be a boom-or-bust business.

The U.S. debate over which group of people — workers, shareholders or consumers — ends up paying the bulk of these corporate taxes will go on forever. But the undisputed and most important point is that individuals pay taxes, not corporations. Therefore, attempts to punish oil companies for "obscene" profits by instituting additional taxes ultimately cause all of us to pay the price. Consumers will pay more at the pumps, and the five oil-producing states that suffered in the oil bust, including hard-hit Louisiana, won't benefit from the boom.

In Washington, politicians are acting as if "profit" is a dirty word, and they've painted a bull's-eye on the backs of the oil companies. With the midterm election season coming, we can expect more charges of "oil profiteering" from the profiteers on Capitol Hill.

New taxes will be no solution to high prices at the pump. President Reagan's axiom seems apt: "Government is not a solution to our problem, government is the problem."

Jonathan Williams is an economist at the Tax Foundation in Washington, D.C.

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