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A Windfall Profits Tax?

1 min readBy: Jonathan Williams

A little-publicized accounting rule change in the recent 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. proposal by the Senate Finance Committee could pave the way for President Bush’s first veto. From the Houston Chronicle:

“Just days after a joint Senate panel quizzed oil industry executives about those lofty earnings, the Senate approved a provision that would prevent major integrated oil companies from using an accounting method known as last-in, first-out, better known as LIFO, when calculating the value of their oil inventories.

The measure would essentially force companies with revenue topping $1 billion a year and production of at least 500,000 barrels a day this tax year to tack on an additional $18.75 a barrel when calculating the value of their oil stockpiles, which in turn increases their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. .”

This legislation is estimated to cost the industry at least $4 billion. As our recent study highlighted, America’s oil companies are already heavily taxed. Over the past 25 years large U.S. oil companies have paid or remitted over $2.2 trillion, adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , in taxes to state and federal governments — three times what they collectively earned in profits over the same time period.

Changes in tax policy should avoid retroactivity and strive for neutrality. This legislation violates both of these fundamental principles of tax policy. The energy industry should not be forced to play by a different set of rules than any other industry. By changing a generally accepted accounting principle like LIFO, the Senate Finance Committee threatens to impose both retroactivity and violate neutrality at the same time.

If the legislation comes out of conference with this short-sighted and damaging tax policy intact, President Bush’s veto pen may finally see the light of day.

(Click image to enlarge.)

Source: Bureau of Economic Analysis, U.S. Energy Information Administration.