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Sen. Coleman?s Backdoor Windfall Profits Tax

2 min readBy: Jonathan Williams

With gas prices topping $3 a gallon and the summer driving season fast approaching, U.S. Senator Norm Coleman (R-MN) seems to be the latest of our elected officials to succumb to the “do something” disease. According to The Hill:

“A Republican senator [Coleman] wants to raise taxes on oil companies to subsidize gas costs for low- and middle-income drivers, but the idea is attracting criticism from other GOP lawmakers.

The bill would raise $4.3 billion through a retroactive revaluation of oil companies’ inventory under an accounting method known as last in, first out (LIFO), which allows companies to assume that the last inventory they bought is the first inventory sold. The money would then be disbursed to the states through a block-grant program that would defray prices at the pump for low- and middle-income drivers.”

Not all Senators seem to be especially fond of Sen. Coleman’s LIFO bill.

“Sen. John Sununu (R-N.H.) called Coleman’s plan “a dangerous precedent and a foolish idea.” Sununu said Congress should not legislate accounting standards that are regulated by the Financial Accounting Standards Board.” [Full Story]

A similar provision to disallow the use of LIFO for oil companies was initially included in the Senate’s version of the 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. bill, but was subsequently dropped in the conference report.

In times of rising prices, LIFO allows companies to reduce their tax liability by increasing their cost of goods sold. Eliminating the use of LIFO inventory accounting is a backdoor technique to raise taxes exclusively on the domestic energy industry — truly a 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. by another name. As we have previously noted in Fiscal Fact No. 48, the oil companies already contribute a windfall of tax revenue to all levels of government.

Outrage over high gas prices in recent months has sparked growing public support for a windfall profits tax. A new poll from the Pew Research Center shows that only 3 percent of Americans blame supply and demand for high gas prices, while a full 31 percent blame oil companies and 25 percent blame the Bush administration.

Clearly, Americans are looking for someone to blame for rising prices at the pump. This in turn creates a perverse incentive structure for elected officials—encouraging them to focus on poorly designed short-term gimmicks rather than long-term policy solutions.