December 19, 2008
Recall the windfall profits tax? No, not the one implemented as part of the Jimmy Carter presidential administration. It's the one proposed by candidate Barack Obama earlier in the year -- the one that would make Big Oil pay a tax on their "excessive" profits and the one that would shift that money over to ordinary folks to pay energy bills.
Well, it died. President-elect Obama had a change of heart. When he made that proposal in the spring, the price of oil was well over $100 a barrel and Americans were pretty peeved. Their investment portfolios were taking a big hit while they read about Exxon reporting quarterly profits in the multi-billions.
Now the price of a barrel of oil is relatively cheap, less than $50. One of Obama's campaign aides told the Houston Chronicle that $80 a barrel was the threshold. Anything more than that and the president-elect would send the foot soldiers over to Capitol Hill to lobby anew. Anything less than that and the oil companies would be safe.
Government's job is to assess taxes and then to distribute that revenue to where it is needed. Such policies, of course, are dynamic and must adjust with the times. Each entity is responsible for paying its "fair" share -- amounts that are offset by tax breaks and subsidies so as to motivate certain types of behavior. The problem with declaring profits extreme in a market-based economy is where exactly to draw the line.
It's one thing to tax an industry once on its profits. But then to hit 'em again may be a bit much. Would anyone step up -- other than lawmakers from Texas and Louisiana -- to bail out Big Oil if prices sunk to the single digits?
When the original windfall profits tax was instituted in 1980, it had been intended to recover the "excessive" profits made by the oil companies as part of the previous Middle Eastern oil embargo. When the levy was tossed out in 1988, it had been considered a failure given that it raised 80 percent less revenue than originally anticipated and it had discouraged domestic oil production and encouraged foreign imports.
"A windfall profits tax is bad policy at any price, and the history books are filled with examples to prove it," says Thomas Pyle, president of the Institute for Energy Research. "The president-elect's decision to reverse course on imposing this Carter-era burden on those who explore for and produce American energy is a heartening development -- both for consumers and an economy struggling to claw its way out of recession. And although the president-elect's spokesman was eager to cite oil's recent drop in price as the reason for this shift in policy, I hope the real explanation can be traced back to the millions of American jobs that would be lost under such a tax, and the billions of barrels of oil we'd lose the ability to produce as a result of it."
Luxury Tax
None of this is to say that Big Oil is above scrutiny. After all, the five leading companies last year made about $120 billion in profits. There's been talk on the Hill about eliminating some of its tax breaks so that those revenues could promote green energy. That's one of those ever-evolving policy realignments -- not a tax on top of tax.
That could make sense as the global energy paradigm shifts so as to minimize carbon footprints. Moreover, clean tech industries are one of the bright spots in the American economy, providing 116,000 jobs and $19 billion in investment in recent times. The U.S. wind industry, for example, expanded by 45 percent in 2007 and contributed about 30 percent of new power generating capacity last year.
If oil prices remain "low" and the economy is still stuck in the mud, the Democratically-led Congress probably won't be able to drum up support to erase oil industry tax breaks. Likewise, the windfall profits tax is already off the table. But that doesn't mean Obama is off the hook. As for small business, it still wants relief from high energy prices -- assistance that the incoming administration says is on its way via the $500 billion stimulus package that will be introduced in January.
"The oil and gas industry has been making excessive profits for several years, even when the price of a barrel of oil was dramatically less than it is now," says American Small Business League President Lloyd Chapman. "At the present moment gas prices have decreased, but with no windfall profits tax in place t he oil companies are free to arbitrarily increase the price of gas at any point in time. "It is difficult to believe President-elect Obama's explanation for dropping one of his most significant campaign promises when you look at the facts."
In any event, taking away monetary benefits once a constituency gets used to it is hard. Oil companies aren't about to budge and will argue that higher taxes in any form would serve to discourage domestic oil and gas drilling and hence decrease supplies. Because demand is expected to continue increasing, prices would rise.
Taxing "excessive" profits may give the appearance of justice. But such a policy is really capricious and unnecessary. It's contrary to free market principles. There's already a progressive tax scale that makes those who earn the most pay the most. Do we want to apply a punitive profit standard to every other industry? And for that matter, why not hit all the zillionaire professional athletes with such levies? In the end, it just doesn't work. In the 1990s, Congress implemented a luxury tax. It's killed the yachting business, putting all those "little people" who build the vessels out of work. That tax had to be repealed as a result.
It's easy to throw mud at Big Oil. But all too often, it's the everyday folk who get soaked.
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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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