Dec. 23, 2005
 
COMMENTARY: Drilling the Taxpayers
 
By Tom Schatz
Special to Huntington News Network
 
Proving once again that members of Congress care more about money than the facts, the Senate has included a $5 billion tax on “excess” profits earned by the nation’s oil companies in its Tax Relief Act of 2005. In a year filled with bad policy decisions, this is among the worst.
 
After weeks of ranting about high oil prices and dragging oil company CEOs to a show hearing, the Senate tax bill will do nothing to reduce the cost of gasoline. The tax bill does not include additional incentives to drill for more oil or expand refinery capacity, and if the House version of the Deficit Reduction Act prevails, there will be no oil extracted from the Arctic National Wildlife Refuge. Senators have no plans to offer rebates to consumers with the $5 billion that the government will supposedly collect. Instead, they are likely to waste it on the usual pork-barrel projects.
 
Aside from the greed demonstrated in the Senate bill, the collection of this money is based on unsound economics and a government-forced change in accounting practices that resemble the worst practices of Enron and WorldCom. Instead of a direct tax, the Senate would force oil companies to revalue the accounting method for oil inventories. The legislation would do away with well-established accounting practices that have been used by many industries since the 1930’s to impose a tax only on oil companies.
 
After the provision was placed in the Senate tax bill, Sen. Orrin Hatch (R-UT) was right on point when he said, "[e]very day we have people coming out here and giving these populist talks about how we have to bring oil and gas prices down, and yet they do everything they can to prevent (development of new supplies).”
 
If it stopped here, it would be more than enough, but another amendment to the Senate tax bill changes the way oil companies get a tax credit for foreign income and revenue. All industries are able to take such a credit, but this bill selectively changes the rules for one industry. The oil companies extract most of their supplies in foreign countries, especially since we don’t let them do it here, and therefore have to pay taxes for that foreign income. Denying them this tax credit puts them at a serious disadvantage in acquiring these resources to foreign oil companies who would not face the same tax penalty. So, the impact of this provision is to increase our dependence on foreign oil, a consequence ignored by senators.
 
The Senate’s punitive measure ignores other vital facts. The oil industry makes less profit per dollar, 7.7 cents, than the national industry average of 7.9 cents. Even Exxon’s earnings of 9.8 cents per dollar on revenue of $9.92 billion in the third quarter was less than half of the average profit ratio for Coca Cola, Eli Lilly, Google, Merck and Bank of America. If the Senate intends to make the collection of “excess” profits above Exxon’s 9.8 cents or the oil industry average of 7.7 cents on the dollar a new standard for U.S. companies, then the software, pharmaceutical, and banking industries, among others, should also be included in the tax bill. Knowing the unbridled lust for tax dollars on Capitol Hill, that may not be taken as a facetious suggestion.
 
While senators are jumping all over the oil industry for its “windfall,” they are conveniently ignoring the income from federal and state gas taxes, which have brought in more than $1.34 trillion since 1977. That is more than twice the amount of domestic profits earned by major U.S. oil companies during the same period. The average tax on gas is 45.9 cents per gallon. It would be more helpful to consumer, taxpayers, and the ability to decrease our dependence on foreign oil, if these taxes were lowered. That would reduce the price at the pump and leave more money to explore for oil and build new refineries.
 
According to a 1990 Congressional Budget Office study, the windfall profits tax in place from 1980 to 1988 cut domestic oil production from between 3 and 6 percent, while oil imports rose from between 8 and 16 percent. But some members of Congress would rather grandstand than understand, so the Senate came up with its “backdoor” windfall profits tax.
 
The House responsibly refused to include any oil tax provision in its tax bill, and the White House has threatened a veto if the conference report includes the Senate language. Aside from the politics, it is obvious that more than a handful of senators need a lesson in economics that includes a reminder that our national energy policy should be to increase the oil industry’s capacity, not tax it out of existence.
 
Tom Schatz is Chairman of Citizens Against Government Waste. Citizens Against Government Waste is a Washington, DC-based private, non-partisan, non-profit organization representing more than one million members and supporters nationwide. CAGW's mission is to eliminate waste, mismanagement, and inefficiency in the federal government: www.cagw.org