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Politicians contemplate tax on windfall profits

Kevin G. Hall - Knight Ridder Newspapers

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April 25, 2006 03:00 AM

WASHINGTON—With oil profits at record levels and consumer anger mounting over high gasoline prices, politicians in Washington are talking again about a windfall profits tax.

It wasn't really successful the last time it was tried—in the `80s—but even so, the United States is hardly the only country that's weighing the move. Russia, Venezuela, Ecuador, Nigeria and others are scrambling to seize some of the oil sector's record earnings through new taxes on production, exports or profits.

This week, with oil companies poised to report steep first-quarter profits and oil trading at $72 to $75 per 42-gallon barrel, both Democrats and Republicans are calling anew for a windfall profits tax.

President Jimmy Carter proposed a windfall profits tax in 1979 that took effect in 1980 as part of a compromise that deregulated much of the energy sector. The tax ranged from 30 to 70 percent, depending on the price of crude oil, and stayed in place through much of Ronald Reagan's presidency. He eliminated the tax in 1988 amid low oil prices.

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The nonpartisan Congressional Research Service and independent economists have studied the windfall profits tax and concluded that it discouraged investment in domestic oil production. Oil companies went abroad to find oil profits that wouldn't be taxed so heavily.

"It had the effect that any economist would have told you. To believe the laws of economic gravity have changed over time is wrong," said Jerry Taylor, a senior fellow at the Cato Institute, a libertarian research center in Washington.

If a windfall profits tax were enacted now, it would discourage investment in exploration and production at a time when such investment is needed most, Taylor said.

That's a view the Bush administration shares.

"It's a failed command-and-control approach of the past. We have seen that approach tried," White House spokesman Scott McClellan said Tuesday.

But Americans are fuming over gasoline prices that average $2.91 per gallon nationwide. They want someone to blame, and good market economics doesn't necessarily make good politics.

Defenders of an excess profits tax, such as Sen. Byron Dorgan, D-N.D., argue that oil companies are reaping an unearned windfall as markets drive the price of oil sky-high. Tax that windfall after crude oil passes a certain price, say $40 or $50 per barrel, and give it back to consumers—especially those with low incomes—in the name of social justice, they argue. Sen. Judd Gregg, R-N.H., the chairman of the Senate Budget Committee, backs one such plan to lower energy costs for the elderly and poor.

Adding to pressure for a new profits tax is anger over reports that former Exxon Mobil Chairman Lee Raymond received a retirement compensation package valued at $400 million. That's enough to buy almost 5.5 million barrels of oil at $73 a barrel.

"There ought to be a windfall profit tax on him," said Sen. Barbara Boxer, D-Calif.

Lawmakers called for a profits tax last year after Hurricanes Katrina and Rita drove up oil prices. But that call, along with congressional grilling of oil executives, never got beyond rhetoric.

Now, with fuel prices climbing again, the call is sounding once more, and this time an unlikely voice has joined the choir. Sen. Arlen Specter of Pennsylvania, the influential Republican chairman of the Senate Judiciary Committee, said Monday that a profits tax was worth considering.

The oil industry vows to fight any return to a windfall profits tax.

"It was a mistake then, and it is still a bad idea. It drained $79 billion from the industry and reduced the rate of return for producing oil in this country," said John Felmy, chief economist for the American Petroleum Institute, the trade association for the big oil companies.

Felmy said "there is no windfall" and that oil profits "are properly used" to reinvest in exploration and to pay dividends to shareholders.

———

(c) 2006, Knight Ridder/Tribune Information Services.

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