The Senate Finance Committee voted yesterday to temporarily change for 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. year 2005 the accounting methods that can be used by integrated oil companies whose gross receipts exceed $1 billion. As today’s New York Times reports:
In a telling sign of the political impact of soaring energy prices, the Republican-controlled Senate Finance Committee voted on Tuesday to impose a $5 billion tax next year on the nation’s biggest oil companies.
The measure amounts to a one-year 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. , a concept that most Republicans had until recently denounced as a discredited idea from the 1970’s. It was added to a larger bill that would cut taxes by about $61 billion over the next five years.
Five of the largest oil companies recently reported that their combined profits for the third quarter surged to $33 billion as a result of skyrocketing oil prices. Last week, top oil executives testified at a Congressional hearing, defending their record results in the face of mounting criticism.
Lawmakers have been prodding the oil companies to give up some of their profits and have floated the idea of a windfall profit tax. But party leaders and the White House have firmly opposed such a move. Many Senate Republicans are counting on their counterparts in the House to reverse the tax on oil companies and add back an extension of tax cuts. (Full story)
This is bad tax policy for countless reasons. First, the provision has been put in place ex post facto. This would create future uncertainty in the oil sector, along with any other industries with volatile profits from year to year.
Second, while there is a widespread belief that corporations are entities separate from individuals, in fact a tax on corporations ultimately falls on people: workers, consumers, and shareholders. Where the incidence of this special tax would fall is unclear, but there is some indication that retirees and those saving for retirement would bear a large part of it.
Finally, this special “tax” is highly non-neutral both across industries and over time. Will it only be in place this year? Will it be extended to other industries?
For details of the bill, be sure to download the full Joint Committee on Taxation report here. Senate Finance Committee ReportShare