Congress, states look to tax oil firms' profits

As public ire rises over high gas prices, it threatens to trigger a backlash against oil companies and their huge profits.

Thursday, ExxonMobil reported first-quarter net income of $8.4 billion. If estimates hold true, the top three American oil companies will have earned more profit in three months than President Bush's proposed savings for eliminating 141 federal programs next year.

So politicians - from Washington, D.C., to Pennsylvania, and California - are pulling out a legislative fix from an earlier oil-price spike: a windfall profit tax that would raise tens of billions of dollars annually.

There are problems. The tax generated far less revenue than expected and actually trimmed domestic oil production when it tried a quarter-century ago.

From 1980 to 1988, the windfall tax brought in $80 billion in gross revenues - far less than the $393 billion projected - before it was abolished, according to an analysis released last month by the Congressional Research Service. It also lowered US domestic production, the analysis found, by somewhere between 1.2 percent and 4.8 percent during that period.

Nevertheless, state and federal politicians are moving quickly to boost oil taxes.

Alaska's senate voted Tuesday to shift from taxing oil production to taxing 22.5 percent of companies' net profits - potentially bringing in billions in added revenue. Though it's not a windfall tax, it is a significant shift to target profits, analysts say.

Other states are focused on the profit gusher, too. In Pennsylvania, Gov. Edward Rendell called for a windfall profit tax on oil. And in California, a taxation committee approved a bill that would impose a 2 percent levy on income above a certain level, leaving it just one step from a full vote by the state assembly, the Associated Press reported.

Meanwhile, Congress is considering a slew of proposals to deal with oil profits and high gas prices. Members of the Senate Finance Committee asked the IRS to provide them with the tax returns for the 15 biggest oil and gas companies in the US. Leading Republicans and President Bush have called for cutting $2 billion in tax breaks. Democrats have advocated halting gasoline taxes for 60 days.

Reps. Edward Markey and Rahm Emanuel, both Democrats, on Wednesday said they would attempt to push their windfall profit tax bill out of the House Ways and Means Committee and onto the House floor for a debate and vote. Other voices, notably Sen. Arlen Specter (R) of Pennsylvania, said that a windfall profit tax should be looked at and might be necessary.

"Senator Specter has expressed support and we think that may be a reflection of growing support among moderate Republicans, which gives us hope," says Jeff Duncan, legislative director for Rep. Markey. "The fact there are multiple bills on this suggests a lot of people are interested."

Proposals in Congress fall into two categories: One like that proposed by Representative Markey is an excise tax. It would tax producers based on the difference between the market price of oil and an adjusted base price. The other is a tax on corporate profits like that proposed by Sen. Charles Schumer (D) of New York. The Schumer bill would apply a 50 percent tax to the taxable income of oil companies that rose above the annual average of their 2000-2004 operating profits, the CRS reports.

An artifact of the 1970s oil crisis, the often-derided windfall profit tax on oil was enacted under the Carter administration to deregulate oil prices. Once deregulated, prices soared. But the WPT culled up to 70 percent of those profits, much of it from existing domestic oil production, while taxes stayed low on new production.

Though President Reagan opposed the windfall tax, his advisers supported it because they saw it stanching the federal budget deficit.

Proponents of a new WPT say that the old windfall profits tax did its job well. "It raised a lot of money at a time when we were having very high oil company profits - it worked," says Robert McIntyre, director, Citizens for Tax Justice, research and advocacy group for tax reform. "In many ways we're in a similar situation today. It might be a good idea again."

But to critics the old windfall tax was a terrible failure that just increased US reliance on foreign oil. Reliance on imports were estimated to be 3 percent to 13 percent higher as a result, the CRS reports.

"We've tried it and we should definitely not do it again," says Ben Lieberman, of the Heritage Foundation. "I don't think we want to increase our reliance on imports again."

The old WPT while called a "profit tax" was really an excise tax because producers paid the tax before profits were determined.

The difference between an excise tax and a true excess profit tax is "crucial," the CRS says. Reinstating the windfall profit tax as an excise tax "could have several adverse economic effects," the CRS reports, adding that a tax that targeted corporate profits might not be so bad.

"The only tax that would be relatively neutral in the short run - that would have no (or few) price effects and other economic effects - would be a pure corporate profits tax," writes Salvatore Lazzari, the CRS economist in his March analysis. "This would not raise crude oil prices and would not increase petroleum imports, in the short run."

That leaves proponents like Mr. Duncan waiting to pull his proposal out into the House for a vote. Though he admits it's a longshot today, its chances "grow every day the gas prices are going up," he says.

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