- The Washington Times - Friday, November 18, 2005

Over the last quarter-century, oil companies directly sent more than $2.2 trillion in taxes, adjusted for inflation, to state and federal governments — threefold their collective profits in the same period. Yet some politicians say this is not enough and are propose a new “windfall profits” tax to raise billions more for federal coffers.

Of course, as most economists agree, corporations don’t pay taxes, people do. Folks like us will really pay those new taxes, either through higher prices at the gas pump or through lower returns in our 401(k)s. Smaller profits for companies means smaller returns for our retirement funds.

This week, Congress brought in oil executives for a grilling on “excessive” profits. The press piled on with headlines such as, “It’s open season on big oil.” At a minimum, both politicians and the media are guilty of biting the hand that feeds them and, perhaps, a bit of hypocrisy: Oil companies pay more than $35 million yearly for newspaper ads, while government profits far more from each gallon of gas sold than do oil companies.

Today, Americans pay an average of 45.9 cents in taxes per gallon of gas. The federal gas tax is 18.4 cents per gallon while the average state and local tax is 27.5 cents. These taxes pumped more than $54 billion into federal and state coffers least year alone — diesel taxes totaled $9 billion more.

Almost all gas taxes are levied at a flat rate per gallon—regardless whether a gallon of gas costs $1.49, $2.49 or $3.49. So while industry profits go through booms and busts, government profits steadily increase.

While politicians decry large corporate profits, those profits generate large corporate income tax payments. Over the last 25 years, we estimate the major domestic oil companies paid $518 billion in corporate income taxes to Uncle Sam and state governments. Oil companies pay billions more to governments in offshore royalties, severance taxes, property taxes, payroll taxes, and the list goes on.

The 1980s were last time we experimented with a windfall profits tax. The tax depressed the domestic oil industry, increased our reliance on foreign oil and failed to raise a fraction of the forecast revenue.

According to a 1990 Congressional Research Service study, the tax stunted domestic production of oil by 3-6 percent and created a surge of 8-16 percent in foreign imports.

Because it receives so much tax revenue from one industry, government runs the risk of every parasitic organism: Eat too much and you kill the host. The last windfall profits tax nearly killed the domestic industry. A new one could finish the job.

Scott A. Hodge is president and Jonathan Williams is a staff economist at the Tax Foundation.

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