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Pennsylvania?s Windfall Profits Tax?

2 min readBy: Jonathan Williams

If Governor Edward Rendell gets his way, consumers, investors and workers in the Keystone State will face a massive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. hike. From the Pittsburgh Post-Gazette:

“A controversial “gross profits tax” on oil companies was one of the centerpieces of Mr. Rendell’s budget address yesterday, and the governor devoted a healthy portion of his annual speech to the issue of ExxonMobil’s record profits over the last three years.

“These profits have come from one source — the pockets of the American people,” Mr. Rendell said near the end of his 55-minute speech. “It is time for the oil companies to finally pay their fair share of the transportation tax burden in Pennsylvania.” [Full Story]

Governor Rendell’s proposed “windfall profits taxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance taxes and taxes levied on lottery winnings can also be considered windfall taxes on individual profits. ” would set a dangerous new precedent of targeting politically unpopular industries for special taxation at the state level. Of course Uncle Sam tried a federal windfall profits tax to punish the oil industry in the 1980s and it proved to be economically devastating.

When we last tried a windfall profits tax, it failed to raise a fraction of the revenue forecasted and crippled the production of the domestic oil industry. As they say, those who fail to learn from history are doomed to repeat it.

While Governor Rendell bemoans ExxonMobil’s record profits, he conveniently neglects to mention the amount of taxes they paid or remitted. In 2006 alone, ExxonMobil’s total tax burden was over $100 billion – that’s roughly two and a half times what they made in profits.

That trend is nothing new. 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.

Oil companies pay billions more to governments in off-shore royalties, severance taxes, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es – the list goes on and reads like the Yellow Pages.

These taxes come from one source – the pockets of the American people.

Real people – not inanimate business entities – pay the true burden of business taxes. Any tax paid by business is immediately transferred onto individuals in three ways.

The first to pay are the employees of oil companies here in the U.S. – people who would make lower wages or perhaps even lose their jobs. Next would be the millions of Americans who have investments in the oil industry – people who would earn lower returns on those investments. In fact, retirement and pension accounts now hold 41 percent of the shares of America’s oil and gas companies.

Finally, the principal group to pay would be American gasoline customers – the millions of people who would pay more at the pump.

If Governor Rendell’s windfall profits tax proposal succeeds, one thing is clear – we’ll all pay the price.

To read additional Tax Foundation work on energy taxes, click here.