March 4, 2007

Oil companies already provide ‘windfall’

(This commentary appeared in the (Harrisburg, PA) Patriot-News on March 4, 2007.)

Gov. Ed Rendell’s plan to create a separate income tax on oil companies would result in a $700 million tax hike on Pennsylvanians.

The proposal — essentially a “windfall profits tax” — is a brilliant political move since it targets everyone’s favorite whipping boy, “Big Oil,” and hides the cost that individuals will ultimately pay. But though the politics are right, the economic consequences of the proposal couldn’t be more wrong for Pennsylvania.

The last attempt at a windfall profits tax failed to raise a fraction of the revenue forecasted and crippled the production of the domestic oil industry. It was a bad idea then, but an even worse idea today because we know better. Those who forget history are doomed to repeat it and the governor is poised to do just that.

While Gov. Rendell bemoans ExxonMobil’s record profits and for not paying their “fair share,” he conveniently neglects to define exactly what a fair share would look like. In 2006 alone, ExxonMobil’s total tax burden was over $100 billion, or roughly 21/2 times what they made in net profits. If that is not “fair,” what is?

The truth is that the nation’s energy companies are already providing a “windfall” for government coffers. 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.

The government collects billions more in off-shore royalties, severance taxes, property taxes, payroll taxes and the list goes on. The governor’s proposal has nothing to do with “fairness” or righting a so-called wrong. It is an attempt to abscond with additional revenue, plain and simple.

Unfortunately, such political tactics are all too common. Like Gov. Rendell, several other states are also attempting to raise taxes without paying a political price, but the people of the Keystone State will see a $700 million tax hike coming out of their pockets.

How? The truth is, when we tax businesses, there is nothing they can do but pass the burden on to individuals. Businesses cannot “pay” corporate taxes anymore than a plot of land can pay property taxes. Real people — not inanimate business entities — pay the true burden of business taxes. THIS TRANSFER happens 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 a lower return in their 401(k). A recent academic study found that retirement and pension accounts hold 41 percent of the shares of America’s oil and gas companies.

Finally, and inevitably, millions of consumers will pay higher taxes at the pump.

Windfall profits taxes failed in the past and there is no reason to think they will work today. If Gov. Rendell’s windfall profits tax proposal becomes law, one thing is clear: we’ll all pay the price.

Jonathan Williams is an economist at the Tax Foundation, a nonpartisan tax education organization based in Washington.