Crude economics

Crude economics

Big Oil already pays big taxes. A windfall profits tariff would stunt
domestic production and cost consumers at the pump.

By Jonathan Williams
JONATHAN WILLIAMS is an economist at the Tax Foundation in Washington.

April 29, 2006

AS GAS PRICES top $3 per gallon, politicians are cashing in big - by
throwing bombs at the U.S. oil industry.

As in every crisis, Washington is suffering from a predictable case of
"do something" disease. Products of the ready-to-eat microwave culture,
Americans want an instant solution to high energy costs, and this lends
itself to grandstanding and election-year maneuvering by politicians of
all stripes.

Numerous lawmakers, from Senate Minority Leader Harry Reid (D-Nev.) to
Sen. Arlen Specter (R-Pa.), are lining up to support a new federal
windfall profits tax, with the aim of redistributing profits from
"greedy" oil companies.

But lawmakers could benefit from a history lesson. The last time this
country experimented with such a tax was the Crude Oil Windfall Profit
Tax Act of 1980. According to a 1990 Congressional Research Service
study, the tax depressed the domestic oil industry, increased foreign
imports and raised only a tiny fraction of the revenue forecasted. It
stunted domestic production of oil by 3% to 6% and created a surge in
foreign imports, from 8% to 16%.

Politicians calling oil companies "greedy" is more than a little
ironic. Tax Foundation studies have shown that state and federal
treasuries profit handsomely from oil industry sales. The average
American motorist pays taxes of 46 cents a gallon on gasoline, of which
18.4 cents a gallon goes to the federal government. States and
localities pocket the rest.

The nation's energy companies are already providing a "windfall" of
taxes. 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. In today's dollars, that's $2.2 trillion - enough
to buy a Toyota Prius for every household in the nation.

In fact, oil companies have paid in taxes more than three times what
they earned in profits during those 28 years.

As the oil industry brings in record profits, it also pays record taxes
that average 39% worldwide, even after accounting for special
deductions and credits. That compares with a 33% average tax rate for
other industries.

In 2005, Chevron, ConocoPhillips and Exxon Mobil paid more than $158
billion in total worldwide taxes. This gargantuan tax bill nearly
equals the entire economic output of Iran and surpasses the total gross
domestic product of 150 of the 184 countries ranked by the World Bank.

It would be unfair and absurd to tax workers at different rates, based
merely on the industry they work in. Similarly, it makes no sense to
tax an industry punitively based on the volatility of its profits. Oil
will always be a boom-or-bust business.

The U.S. debate over which group of people - workers, shareholders or
consumers - ends up paying the bulk of these corporate taxes will go
on forever. But the undisputed and most important point is that
individuals pay taxes, not corporations. Therefore, attempts to punish
oil companies for "obscene" profits by instituting additional taxes
ultimately cause all of us to pay the price. Consumers will pay more at
the pumps, and the five oil-producing states that suffered in the oil
bust, including hard-hit Louisiana, won't benefit from the boom.

In Washington, politicians are acting as if "profit" is a dirty word,
and they've painted a bull's-eye on the backs of the oil companies.
With the midterm election season coming, we can expect more charges of
"oil profiteering" from the profiteers on Capitol Hill.

New taxes will be no solution to high prices at the pump. President
Reagan's axiom seems apt: "Government is not a solution to our problem,
government is the problem."

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