- The Washington Times - Tuesday, January 23, 2007

The recent House vote to raise taxes on oil companies demonstrates once again that whatever the liberal Democrats may say about only taxing “the wealthy,” they always end up gouging the middle class.

The energy bill recently rushed through the House in Nancy Pelosi’s first “100 hours” repeals the 2004 corporate tax cuts for oil and gas, blocks incentives for exploration, and imposes new royalty fees on deepwater oil and gas drilling fields in the Gulf of Mexico. Altogether, it will give Congress about $14 billion extra to play with. Not a bad haul, especially as it comes out of the hide of “big oil,” whose profits always seem to be modified with the adjective “excessive” or “windfall.” But who really pays?

Ronald Reagan used to point out that “corporations don’t pay taxes, people do.” To a great extent, corporate taxes are looked on by companies as a cost of doing business, and as such are passed on more or less directly to the consumer in higher prices at the pump. As these new tax increases fall only on domestic producers, they will give a competitive advantage to foreign oil and gas companies and thus tend to make the United States even more reliant on foreign oil than we already are — a strange outcome for a Democratic leadership that at least professes a goal of U.S. energy independence.

It should also be noted that these special taxes on oil come on top of a host of federal, state and local taxes which all of us — you and me — already pay at the pump.

The federal tax on gasoline (as of October) is about 18.4 cents per gallon. The average state gasoline tax is 18.2 cents — though in New England, where everyone apparently is expected to bike to work, state gasoline taxes average almost 23 cents a gallon. Other taxes — including sales taxes, gross receipts taxes, oil inspection fees, underground storage fees, and miscellaneous environmental fees — add another 8.9 cents per gallon. Altogether, this works out to an average nationwide tax on gasoline of 45.5 cents per gallon.

By contrast, oil companies, which must endure trillions of dollars of investment risk exposure, earn 5.7 cents on each dollar sale of gasoline — or 14.25 cents for a $2.50 gallon of gas — an “excess profit” that comes to significantly less than one-third of that of the government, which bears exactly zero risk. Meanwhile oil companies have to hand over up to 35 percent of their profits to the government while of course no one taxes the government. To paraphrase that popular song, one has gotta ask, “who’s gouging who?”

For the five years from 2000 to 2005, in fact, oil and gas industry earnings per dollar of sales have recorded a rate of return almost identical to the industry average of 51/2 percent, and just one-third that of banks and pharmaceuticals. Nevertheless, oil still has to compete in the markets for the same investment dollars those other companies do, and that’s where the middle class gets slammed again. More than 40 percent of oil company stocks today are owned by private IRAs and pension funds. But that’s OK with Congress, because even if tax increases depress the value of those hard-earned retirement savings, it doesn’t affect their generous pensions, which come directly out of your tax dollars. In this way, your congressman’s tax increases are effectively taking away your retirement savings to subsidize his own.

The worst effect of Congress’ continuing raids on the oil companies, however, isn’t simply the money they’re extracting from the private economy and from your and my pocketbooks. The worst effect isn’t even directly economic.

The tax incentives and favorable leasing agreements in the Gulf that Congress is now undoing were designed explicitly to promote domestic oil and gas production so the United States would depend less for its energy resources on unstable and often highly unfriendly governments in war-torn regions of the world.

Liberal democratic plans to redistribute some of this tax take to “renewables” such as solar and wind energy will do little to boost their contribution from the paltry 2 percent of U.S. energy consumption they supply today — leaving us just as vulnerable as ever.

Any serious policy clearly needs to increase domestic oil and gas exploration. Unfortunately, the Democratic House of Representatives is clearly going in the other direction. Let’s hope the Senate thinks better of it when it considers the bill.

Gene Heck is a business development economist and author of the new book “Building Prosperity: Why Ronald Reagan and the Founding Fathers Were Right on the Economy.”

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