Saturday, November 22, 2008

Windfall Profits Tax on Oil Companies: Is this Change?

Here are some quotes that may sound familiar to you:

"Unless we tax the oil companies, they will reap huge and undeserved windfall profits."

"When I proposed this tax I indicated that the revenues should be used for three basic purposes: one, to assist low-income households in bearing the burden of rapidly increasing energy costs; secondly, to improve the transit systems of our country, including not only rail but also buses and subways, and even the sharing of rides in other rubber-tired vehicles; and third, the development of alternative supplies of energy."

Do you recognize any of these quotes? Did you hear something similar during the 2008 campaign? In all actuality, these are quotes from former president Jimmy Carter around the time he enacted "The Crude Oil Windfall Profit Tax of 1980". That is correct; we have tried this before. A windfall profits tax on oil companies is not change; rather it represents a government policy that has already failed us.

For starters, "The Crude Oil Windfall Profit Tax" wasn’t exactly a windfall profits tax. It was an excise tax on domestic oil production based on the amount of oil a company produced. The more barrels of domestic oil they produced, the more they would pay in taxes. The average citizen was struggling with high energy prices at the same time oil companies were reaping huge profits. This was seen as unfair by Congress, President Carter, as well as the average citizen. Once the tax was enacted, the federal government would then reinvest this money in alternative energy supplies and inject the money back to other areas of the economy to help low income citizens deal with rising energy costs. After all why should these greedy oil companies keep this money when this money can be moved around to other people who need it more than they do? It only makes sense, right? This was a socialist concept supported by Jimmy Carter and the overwhelmingly Democratic controlled Congress.

It was estimated that the tax revenue from a windfall profits tax would exceed $320 billion during the years of 1980 and 1989. In reality, this tax brought closer to $80 billion in gross tax revenue. The net amount was actually much lower than this because the tax was deductible against corporate income. The final net amount was around $40 billion by the time this deduction was figured.

The graph below illustrates the projected tax revenue versus the actual tax revenue:

As the graph indicates, the realized tax revenue from a windfall profits tax never came close to the projected expectations. So what exactly were the results of "The Crude Oil Windfall Profits Tax;" and why were the results so disappointing? How could something that seemed so good turn out so bad?

According to the "Congressional Research Service,” the tax had actually decreased domestic production by 3 to 6 percent. Domestic production dropped by the oil companies to avoid having to pay extra money in taxes. As a result of drops in domestic production, America increased their dependence on foreign oil by 8 to 16 percent. The windfall profits tax actually lead to more oil imports instead of producing the oil domestically. In addition, like most government mandates, this tax was very difficult for the oil companies to comply with. At the same time, this was equally as burdensome for the IRS to collect. It’s no wonder why this tax didn't meet the target revenue. In today's world, the last thing we need is to increase our dependence on foreign oil.

According to the Tax Foundation, US Oil companies as of 2005 spent nearly $150 billion just to comply with existing federal income tax alone. The Tax Foundation also states that between the years of 1980 and 2005 oil companies paid nearly $2.2 trillion (adjusted for inflation) in taxes at both state and federal level. In addition, the price of gasoline has both state and federal taxes figured into the price at the pump, which you pay when you fill your gas tank. The Democrats back in 1977 as well as today do not understand that corporations cover their costs in the price of the product they sell. In this case the product is gasoline. Increasing taxes on any company is going to be passed off onto you, the consumer. In the end, it will mean higher gas prices at the pump. So why are we crossing this bridge again when we see the data clearly shows it has not worked before? Is this the change America is looking for?

The average profit from a gallon of gasoline is about 8 percent, which is way less than most other industries. When a corporation makes a profit, the company will keep a portion of this profit as "Retained Earnings”, which is money for the business to operate. This money will then be used to find more oil, find more alternative fuels, expand and hire more employees as well as improve the way they produce gasoline. In essence, oil companies showing a profit can actually lead to lower gas prices due to better equipment, production efficiencies, and oil exploration. Probably the most overlooked aspect of this is the fact that oil companies have provided millions of jobs and increases in wages during these prosperous times. Increasing their costs to do business will only force them to cut back on these expansions or even worse, leave the United States for a more favorable business environment. Today the global market is more competitive than ever, and America should be looking for ways to attract companies to stay in the United States.

Finally, the profits that are not kept in retained earnings are distributed to the shareholders. Who are these shareholders? Well if you own a 401k or a pension plan, the chances are you own shares of stock in an oil company. About 40 percent of all oil stock is owned by mutual and hedge funds. Does our government have the right to tell you that you do not have the right to a prosperous and happy retirement? Who is our government actually hurting if a windfall profits tax is enacted the way Nancy Pelosi, Harry Reid, and Barack Obama would like? The truth is they will be hurting everyone including the low income and middle class families they claim they to be assisting. In 1988, "The Crude Oil Windfall Profit Tax" was repealed by Ronald Reagan because it was actually harmful to our economy. Why would anyone consider revisiting this terrible mistake 20 years after it was repealed? This does not represent change, but a failure in history our government is about to repeat.


No comments: