How Not to Help the Hurricane Regions — Tax Oil

September 26, 2005

Great piece from today on Bloomberg News by Kevin Hassett of the American Enterprise Institute:

It’s time for a pop quiz. Suppose a region of the country is hit by two massive hurricanes causing unprecedented destruction. Will it speed the recovery if the U.S. government imposes a massive new tax on that region’s most important industry?

Incredibly, the U.S. may be getting ready to try.

Because of storm-caused supply disruptions in the Gulf of Mexico, oil and gas prices have skyrocketed. This reminds us how much U.S. production occurs between Texas and Florida. According to the Department of the Interior, 29 percent of the country’s domestic oil comes from the Gulf of Mexico.

Democratic Senator Byron Dorgan of North Dakota introduced a bill this month to impose a windfall-profits tax on oil companies. The bill would impose a 50 percent tax on the additional revenue received by integrated oil companies when prices top $40 a barrel.

The base price would be adjusted annually for inflation, and the tax would expire three years after its enactment. Revenue from the tax would be returned to individuals as rebates. The tax wouldn’t apply to oil discovered after the law takes effect.

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If this passes, consider what message Washington would be sending:

July 2005: Pass an energy bill that gives huge tax breaks and subsidies to oil companies (supposedly aimed at increasing production)

Late 2005: Pass a tax on oil companies for profits earned, which would deter future production.

But this wouldn’t be the first time Washington has sent an unclear message to its citizens and businesses.

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