Tuesday, May 02, 2006

Think Again about Taxes on Big Oil

If you hear people jumping on the bandwagon to raise taxes on "big oil," you can show this column by Jonathan Williams from the L.A. Times explaining how the oil companes are already taxed. Remember, when you tax more of something, you get less of it. Is that what we desire?
But lawmakers could benefit from a history lesson. The last time this country experimented with such a tax was the Crude Oil Windfall Profit Tax Act of 1980. According to a 1990 Congressional Research Service study, the tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted. It stunted domestic production of oil by 3% to 6% and created a surge in foreign imports, from 8% to 16%.

Politicians calling oil companies "greedy" is more than a little ironic. Tax Foundation studies have shown that state and federal treasuries profit handsomely from oil industry sales. The average American motorist pays taxes of 46 cents a gallon on gasoline, of which 18.4 cents a gallon goes to the federal government. States and localities pocket the rest.

The nation's energy companies are already providing a "windfall" of taxes. According to Department of Energy data, from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today's dollars, that's $2.2 trillion — enough to buy a Toyota Prius for every household in the nation.

In fact, oil companies have paid in taxes more than three times what they earned in profits during those 28 years.

As the oil industry brings in record profits, it also pays record taxes that average 39% worldwide, even after accounting for special deductions and credits. That compares with a 33% average tax rate for other industries.
Since the oil industry is notoriously cyclical, remember that profits today can pay for the lean times tomorrow. Windfall profit taxes will end up hurting us more at the pump.