November 16, 2005

Who Profits at the Pump?

(The following article originally appeared in the November 16, 2005 edition of National Review.)

Over the past quarter century, oil companies directly sent more than $2.2 trillion in taxes, adjusted for inflation, to state and federal governments — three times what they collectively earned in profits over the same time period. Yet some politicians say this is not enough and are proposing a new “windfall profits” tax to raise billions more for federal coffers.

Of course, as most economists agree, corporations don’t pay taxes, people do. Folks like us will really pay those new taxes, either through higher prices at the gas pump or through lower returns in our 401(k)s. Smaller profits for companies means smaller returns for our retirement funds.

Congress recently brought in oil executives for a grilling on “excessive” profits. The press piled on with headlines such as, “It’s Open Season on Big Oil.” At a minimum, both politicians and the media are guilty of biting the hand that feeds them and, perhaps, a bit of hypocrisy: Oil companies hand over more than $35 million per year to newspapers for advertising, while the government profits far more from each gallon of gas sold than do the oil companies.

Today, Americans pay an average of 45.9 cents in taxes per gallon of gas. The federal gas tax is 18.4 cents per gallon while the average state and local tax is 27.5 cents. These taxes pumped more than $54 billion into federal and state coffers last year alone. Diesel taxes totaled $9 billion more.

Almost all gas taxes are levied at a flat rate per gallon, regardless of whether a gallon of gas costs $1.49, $2.49, or $3.49. So while industry profits go through booms and busts, government profits grow steadily larger.

While politicians decry large corporate profits, those profits generate large corporate income-tax payments. We estimate that over the past 25 years, the major domestic oil companies paid about $518 billion in corporate income taxes to Uncle Sam and state governments. Oil companies pay billions more to governments in off-shore royalties, severance taxes, property taxes, and payroll taxes — and the list goes on.

The last time this country experimented with a windfall profits tax was in the 1980s. Back then, the tax depressed the domestic oil industry, increased our reliance on foreign oil, and failed to raise a fraction of the revenue forecasted. According to a 1990 Congressional Research Service study, the tax stunted domestic production of oil by 3 to 6 percent and created a surge in foreign imports between 8 and 16 percent.

Because it receives so much tax revenue from this one industry, the government is subject to the same risk as any parasitic organism: If it eats too much it will kill the host. The last windfall profits tax nearly killed the domestic oil industry. A new one could finish the job.