The state Legislature recently gave most New Yorkers some good news: The cost of a subway ride will only rise by a dime instead of a quarter in spite of a substantial rise in costs. At the same time, the Legislature gave another group of New Yorkers some bad news: They would pay the difference.
The second group was the major oil companies who do business in the state. They became subject to a state tax on their gross receipts which is expected to bring into New York State $235 million of which $200 million will go to the Metropolitan Transit Authority to pay for mass transit.
New York is not alone; other states have either enacted taxes on the oil companies, or are contemplating it. For example, Connecticut has enacted a 2 percent gross earnings tax which goes into effect on July 1. Illinois and Rhode Island both are considering bills that would tax the gross earnings of the oil companies by 1.5 percent. Vermont also has a tax on the oil companies, including their income from foreign dividends, and Pennsylvania is considering its own version of a windfall-profits tax.
As can be expected, the oil companies are not enthralled by the prospect of paying still more taxes. And, in the case of both New York and Connecticut, the taxes have been structured so they can't be passed on to consumers in the state. Thus, the oil companies must either pass the tax on to consumers in other states or have their shareholders absorb it. This prompted Mobil Oil Corporaton on June 16 to send New York Gov. Hugh Carey a telegram claiming the tax "borders on economic expropriation."
Peter Spina, manager of public affairs for Mobil's marketing and refining division, says the legislation "poisons the atmosphere for all businesses in the state."
In fact, the New York Chamber of Commerce and Industry says it would have preferred a different approach, such as using a higher graduated tax on vehicle registration, or a gasoline sales tax. The oil company tax, says Lou Venech, director of policy planning, is "inequitable."
The companies are not just relegating the fight to their public relations staffs. In Connecticut, Mobil Oil and a number of other oil companies filed a lawsuit against the state claiming that a portion of the tax was unconstitutional. And, Mobil officials say they are studying the possibility of bringing a lawsuit against New York State as well.
However, the oil companies so far have not been very successful in the courts. On June 11 the US Supreme Court ruled that wisconsin could tax the business Exxon does outside of the state, such as exploration and production. The court said since the oil companies are so "integrated," that is, with operations tied together in a "unitary" type of system, Wisconsin could figure the amount earned on those parts of the business related to the state. Earlier in March, the court ruled against Mobil in allowing Vermont to tax the foreign dividends of oil companies.
The states are taxing the oil companies in large measure because they appear to be a convenient source of revenue. A spokesman for the governor states, "If there is a rationale for this tax, it is that the oil companies are doing extremely well and it was felt they should do more for the public good with the profits they report."
New York Times reporter Richard J. Meislin said the tax was picked because "people are angry with the oil companies," and the tax was perceived by the Legislature as causing the least political damage for the legislators who are up for re-election this year.
The governor, in a press conference, said that tax would "trap" revenues in the state that otherwise would be moved to other places, such as the Sunbelt. He disputed the contention that oil companies would refuse to sell their product in New York, noting "the market is here." However, the oil companies say their profits on marketing and refining are small. Mobil, for example, says it made only 2 percent on its marketing and refining operations in the US last year. Thus, a 2 percent tax on gross receipts on 2 percent profit causes the company some anguish.
Both CIBRO Petroleum Products Inc. and Sears Petroleum & Transport Corporation said they would lose money in the state on the tax. In the state based on its $350 million in receipts. CIBRO expected to make $4 million this year -- before the tax. Ironically, CIBRO's largest customer is the State of New York.
The taxes, the oil companies say, also raise some other questions. For example, Shell Oil Company in a statement, says the increased taxes "will reduce the funds available to the oil industry for reinvestment in the critical task of finding more energy in this country." Already, Shell notes, the windfall profits tax has reduced its income by $25 million to $30 million a month.
If the tax in New York is upheld by the courts, Shell estimates its cost at $ 10 million per year. It will have to fork out another $2.5 million in Conecticut.
In the case of Mobil, the tax could cost between $20 million and $30 million in New York alone. Governor Carey dismisses the possibility that oil companies could lose money because of the tax. Rather, he states, they can deduct a portion of the state taxes from their federal income taxes.
Mobil has 22 percent of the gasoline market in New York while Exxon and Texaco each have about 10 to 12 percent. The rest of the market is fragmented among a lot of other oil companies.