Windfall Taxes

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Republicans in the Senate need to get a grip in respect of energy prices. The Energy and Commerce committees are getting set to grill, next week, oil executives on why profits are so high while prices are high, too. As if convening hearings on such a tautological question weren’t bad enough, at least a few allegedly Republican senators appear dangerously close to stretching out the greedy hand to “solve” the “problem,” and one of those has already defected to the dark side.


The old idea of a “windfall profit” tax has found new life in the midst of an unusually profitable earnings season for petroleum giants – by one count, the four largest global players will rake in a combined $100 billion in profits this year. As long-term trends such as static refining capacity and congressional intransigence on domestic drilling combine with short-term effects such as seasonal demand trends and hurricanes in the Gulf of Mexico, the result has been record nominal gas prices and jitters over the cost of home heating oil as winter approaches. So perhaps it was inevitable that someone on Capitol Hill would propose a tax.


The usual suspects on the Democratic side of the aisle, including Senators Dorgan and Clinton, have proposed iterations of new taxes on petro-profits; The Sun’s Meghan Clyne detailed Mrs. Clinton’s proposal in a dispatch on October 26. But all this talk of “excess profits” seems to be resonating in some quarters on the Republican side. The majority leader, Senator Frist, issued a statement on Monday “applauding” the notion that the hearings will “shine a spotlight” on the “growing concern” of “sharp rises and disturbing disparities in energy costs,” thus ensuring “that businesses are behaving responsibly and consumers are being protected appropriately.”


Meanwhile, Senator Snowe expressed concern at “the record third quarter earnings reports by petroleum companies” called on oil companies to form a “voluntary” fund for low-income heating oil assistance, a position echoed by the chairman of the finance committee, Senator Grassley. The House speaker, Congressman Hastert, called last week on oil companies to “do their part to ease the pain American families are feeling from high energy prices,” although a spokesman was adamant yesterday that the Speaker does not support a windfall profits tax.


Worst of all was Senator Gregg, who last week called outright for reinstating the “excess profit tax” signed by President Carter in 1980, which has been off the books for more than 15 years. “With people being forced to pay $3 a gallon for gas and $2.50 for oil to heat their homes, it is apparent that the oil companies have taken advantage of the trust of the American people,” said the “Republican” senator from New Hampshire. So much for the state’s motto “Live Free or Die.”


What in Sam Hill is an excess profit, anyhow? As an economist at the Mercatus Center, Alastair Walling, wrote recently in these pages, one cause of the returns we’re seeing now is that a key part of the supply chain – refining – remains only thinly and erratically profitable, discouraging new investment in refineries and pinching supply. Further reducing profits through increased taxation hardly looks like a sensible way to fix this.


Profits in the industry as a whole are equally erratic, even if some years seem like “fat years.” A recent analysis prepared by the Tax Foundation found wide cyclical swings in industry-wide profits. Inflation-adjusted profits of the 25 largest American oil companies averaged $33 billion a year between 1977 and 1985, after which profits averaged $12.3 billion a year for the next decade, before picking back up again in the mid 1990s.


Politicians attacking these profits may discover in the course of this fight that millions of working middle-class Americans stash away their retirement nest eggs in individual retirement accounts or 401(k)s. Anyone who invests in an index fund has a stake in the profitability of the oil companies. The profits either go back to those shareholders in dividends or get reinvested in the company to protect shareholder value in the future. Senators agitating against profits seem to be forgetting about these constituents.


Now, if one wants to talk about what is driving up prices at the pump, let’s talk about taxes. The Tax Foundation study finds that the tax part of the gas-price equation has been remarkably consistent over the years. Excluding corporate income taxes, federal and state government excise and sales tax collections alone have outpaced oil-company profits for all but three years between 1977 and 2004. If politicians were really concerned about the prices their constituents pay at the pump, they would investigate how these taxes came to be larded into the gas price. Republicans used to know how to run on the tax issue. But, right now at least, some of them are only running on empty.


The New York Sun

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