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Stick It to Big Oil ... and Sock It to the Middle Class
April 3, 2008
By Andrew Moylan
Rather than learn from the energy policy mistakes of our recent history, some in Congress are instead bound and determined to repeat them.
This week, a select House Committee on global warming questioned executives from the five largest oil companies about their role in what some predict will be $4-a-gallon gasoline by this summer. Congress is again wasting time and taxpayer money for political theater rather than looking at their own failed policies that have restricted domestic supply and manufactured a market for forms of renewable energy without adequate demand.
Congress has also revived legislation that would impose $17 billion in punitive taxes on U.S. oil and gas companies in order to fund alternative energy programs. Even after witnessing the failures of vengeful tax increases and misguided subsidies over the past three decades, some seek a new millennium edition of that very policy.
Economics 101 tells us that when you tax something, you get less of it. Raising $17 billion in taxes on domestic oil companies will do exactly what the windfall profits tax of the 1980s did: reduce domestic oil production and increase oil imports. Predictably, Congress is not letting a little thing like common sense and the unvarnished truth get in the way of its political grandstanding to stick it to so-called Big Oil.
So is Big Oil paying its fair share of taxes? The caricature painted by some in Congress could lead you to think that oil companies routinely shirk their tax responsibilities and pay a miniscule amount compared to their profits. The reality, however, is very different. By virtually any measure, oil companies pay a tremendous amount in taxes.
According to the U.S. Department of Energy, the top 27 energy-producing companies in the United States paid more than $30 billion in taxes in 2001. In 2006, that number spiked to just under $90 billion, almost a 300 percent increase in just five years.
When combining corporate income taxes with the huge amount of excise and extraction taxes paid, oil companies pay a worldwide effective tax rate of 37 percent, higher than virtually any other industry.
Barely two weeks ago, The Washington Post reported that the recent price increase for coal has outpaced that of oil, and that mining companies are experiencing a surge in profits. By the logic of some lawmakers, "Big Coal," which happens to provide good jobs in some of the most impoverished areas of the U.S., will be in for a tax hike next.
But who or what, exactly, is Big Oil? The high-taxers in Congress would have you believe that it consists of a small group of mustachioed fat cats wearing monocles and plotting the destruction of the American family budget for their own enrichment. In reality, large oil companies are owned by a diverse array of investors, many of them solidly middle-class.
A recent study by economists Robert J. Shapiro and Nam D. Pham found that 69.5 percent of the ownership of public oil and natural gas companies consists of some combination of mutual funds, asset management companies, pension funds, and other investment management vehicles. Another 29 percent is owned by individual investors who manage their own portfolios.
That leaves just 1.5 percent which is owned by company officers and board members. So contrary to the rhetoric, higher taxes wouldn't just hit mega-rich CEOs, they would sock it to millions of investors and their retirements.
Even voters in liberal California came to realize the fatuous nature of this kind of legislation. In 2006, an initiative came to a vote called Proposition 87. It would have raised $4 billion in taxes on oil companies to fund alternative energy programs and used the same shallow, feel-good rhetoric that some in Congress are employing now. The plan was rejected by a 55-45 percent margin because voters realized that higher taxes would only mean higher prices and less energy.
When Congress meddles in the free market by trying to pick winners and losers, taxpayers always seem to be left holding the short end of the stick. Our history is littered with alternative energy failures whose losses were simply heaped onto the back of the American taxpayer.
Remember the boondoggle called the Synfuels Corporation, which swallowed billions in tax dollars without producing a drop of commercially viable fuel? Instead of repeating those mistakes, Congress ought to focus on creating a sound, low-tax energy policy that treats all segments of production and development equally.
Solid and steady may not get coverage on the nightly news like a bombastic speech, but it will do much more to secure our energy and our economy well into the future.