The OPEC Protection Act February 17, 2006; Page A12
Now that President Bush has declared a national commitment to end our alleged addiction to foreign oil, naturally the first energy bill that Congress wants to enact this year would make America more dependent on foreign energy companies.
That would surely be the result if Congress passes two provisions buried in the Senate version of a tax bill now in House-Senate conference: One is a tax on oil company inventories, which is a disguised windfall profits tax on five big oil companies; the second would repeal the foreign tax credit for the same companies.
Democrats -- and Maine Republican Olympia Snowe -- promoted the provisions late last year as a way to punish the companies whose CEOs had defended their pricing policies before Congress. But the more you understand the details, the nuttier this looks. For example, the $4 billion to $5 billion windfall tax on inventories applies only to the reserves of U.S.-based oil producers (such as Exxon and Chevron), while foreign producers pay nada.
This is an energy policy only Arab oil sheiks could love, because it drives their production and profits up, at the expense of home-grown producers. When Congress last passed a windfall tax on oil in 1980, America's domestic crude oil production plunged and demand for foreign oil increased by almost 15%. We imposed a tax on ourselves and OPEC nations got the windfall.
Equally wacky is New York Senator Chuck Schumer's idea to deny the same companies the U.S. foreign tax credit -- a fixture of the corporate income tax since 1917. If this took effect, American oil companies would have to pay the U.S. corporate tax rate and the taxes in the country where it produces the oil. Almost no other nation in the world requires companies to pay a double tax on foreign profits.
So if Mr. Schumer has his way, U.S. oil companies would have to pay as much as a 25% higher tax on foreign-produced oil than if it were drilled from the ground by a French, Chinese or Danish firm. Mind you, the U.S. would still import the oil, but any profits from that oil would flow to foreign, rather than U.S., firms and investors.
Yes, oil companies are making big profits. Exxon's 2005 profit of $36.1 billion was the highest of any firm in American history. That sure seems preferable to the results of, say, General Motors, which is losing money and laying off workers. The S&P 500's earnings growth would have been one-third lower since the fourth quarter of last year if it were not for the energy industry. Investors beware: Tax away those profits and Washington may well promote a bear market.
The latest justification for these ideas is that the oil companies paid tiny royalties on many of their offshore leases. But Uncle Sam freely entered into these contracts. The companies then took the risk of investing billions of dollars in new production, even in the 1990s when prices were at less than $15 a barrel and profits were smaller. It's hardly equitable to retroactively tax the companies on deals consummated a decade ago simply because they turned out well for these firms. This isn't tax fairness; it's confiscation.
In any case, the biggest "windfall" from high oil prices hasn't gone to the oil companies but to federal, state and local governments. The Tax Foundation reports that the average tax on gasoline is 46 cents a gallon. The average profit that the oil industry earns on that gallon of gas, even at today's high prices, is 18 to 20 cents. The government already grabs $2 for itself for every dollar the energy companies and their investors receive. The harmful addiction problem here isn't Americans to oil. It is politicians to taxes.
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