April 25, 2006

The Windfall Profit-Taxers Are Back

(The following article originally appeared in the February 15, 2006 edition of the Investor’s Business Daily.)

The latest annual earnings for ExxonMobil have shattered U.S. annual corporate-profit records. So, predictably, some politicians and pundits are back on the oil-bashing bandwagon that began rolling last fall.

In his response to the president’s State of the Union Address earlier this month, Virginia’s Gov. Tim Kaine talked about how oil companies should “share in our sacrifice” by returning “excess profits.” Statements like this bear a hint of irony, since the government collects billions of dollars from U.S. oil companies and takes an average of 45.9 cents from every gallon of gasoline purchased.

America’s energy companies are already providing a “windfall” of taxes — including corporate income, franchise, payroll, property, severance, and excise taxes. New filings with the Securities and Exchange Commission (SEC) show that the largest oil and gas companies in America (Chevron, ConocoPhillips, and ExxonMobil) are set to pay or remit over $158 billion in worldwide taxes for 2005.

This tax burden on American “big oil” nearly equals the total economic output of Iran and exceeds total GDP in 150 of the 184 countries ranked by the World Bank.

In 2005 alone, these companies set aside more than $44 billion to pay corporate income taxes, nearly a 50 percent increase from 2004. The average effective tax rate for the major integrated oil and gas industry is estimated to equal 38.3 percent, while the rate for the market as a whole is estimated to equal 32.3 percent.

These large corporate income-tax payments by oil companies undermine the case for a windfall profits tax, but that does not stop some politicians from trying anyway. Even though supporters of windfall profits taxes seem to be failing in their latest attempt to impose a revived version of the 1980s-style tax, which consisted of a straightforward rate hike, they cleverly found an alternative plan to tax the domestic energy industry.

Last year, the U.S. Senate passed legislation that contained provisions to restrict full use of foreign tax credits and prohibit the accounting practice where inventory is estimated on a “last in first out” (LIFO) basis for tax purposes.

These provisions target U.S. firms and would put them at a significant disadvantage in their competition with large foreign firms — including the state-run oil companies of India and China. Today, companies based in the U.S. already face the highest combined state and federal statutory corporate tax rate in the OECD — higher than the burden in even France or Sweden.

Eliminating the use of LIFO inventory accounting and foreign tax credits is a backdoor technique to raise taxes exclusively on the domestic energy industry — truly a windfall profits tax by another name. Imagine if Congress shaped tax policy differently for workers in different industries. That would be absurd and unfair. Similarly, Congress should not be in the business of adopting tax policies that treat companies differently based on their industry, however politically out of favor certain industries may be.

This nation’s experiment with windfall profits taxes in the 1980s proved to be economically devastating. When we last tried the tax it failed to raise a fraction of the revenue forecasted and stunted domestically produced oil. Let’s hope that experience taught our lawmakers a valuable lesson.

Some pundits and politicians still consider “profit” a dirty word. However, if politicians pass legislation to punish the oil companies for those profits, no one should kid themselves about who would ultimately pay the price: we all would. The first to pay would be 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 lower returns on those investments. Finally, the principal group to pay would be American gasoline customers — the millions of people who would pay more at the pump.

In other words, the old saying is true: Corporations don’t actually pay taxes — people do.