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NTU Urges the Senate to Remove Windfall Profits Tax from Reconciliation Bill

February 6, 2006

The Honorable Bill Frist
Majority Leader
United States Senate
S-230 United States Capitol
Washington, DC 20510

Dear Majority Leader Frist:

The National Taxpayers Union (NTU) has been a strong advocate of fair, limited taxation for over 35 years. On behalf of our 350,000 members nationwide, we strongly urge you to remove certain provisions of the Senate Budget Reconciliation Bill that constitute a windfall profits tax on the U.S. oil industry. If enacted, these provisions would undoubtedly have a damaging effect on the national economy and serve only to worsen our current energy problems.

The two provisions of concern are the proposal to enact a temporary tax on domestic oil producers to fund the Low Income Heating Assistance Program and the modification of the Foreign Tax Credit rules. Both of these would unfairly and unwisely target legitimate profits earned by American oil producers based solely upon the existence of high oil prices caused by rising demand and natural disasters. In other words, they are different versions of a windfall profits tax. History has shown these policies to be unwise and counterproductive.

America had a windfall profits tax in effect from 1980 to 1988. During this time, the Congressional Research Service estimated that annual domestic oil production decreased by 3 percent to 6 percent and annual oil imports increased between 8 percent and 16 percent. Our nation cannot afford to go through this experience again.

Penalizing short-term gains reduces the industry's incentive and capacity to find and develop new sources of energy. At a time when worldwide demand threatens to outpace energy supplies, we should be doing everything possible to encourage more production -- not hinder it.

Levying additional taxes on American oil companies puts them at a competitive disadvantage with foreign-owned firms. Since oil is a fungible commodity with prices determined by a global marketplace, if U.S. companies are saddled with unnecessary taxes, they will find it increasingly difficult to compete in the international arena. The end result is more imported oil in the United States and higher retail prices for all of us.

Our economy functions best when government allows natural market forces to freely operate. Windfall profits taxes disrupt normal market fluctuations, causing supply and demand imbalances and inevitably hurting consumers. Please eliminate these disastrous policies from the legislation before you.


John Berthoud