Politics & Government

A tax on Big Oil's windfall profits sounds good, but is it?

An oil pump pumps oil from the ground in 2002.
An oil pump pumps oil from the ground in 2002. Chuck Kennedy / MCT

WASHINGTON — Hitting oil companies with a windfall profits tax seems like a perfect campaign pitch, since it would effectively return part of the industry's record profits to strapped consumers.

But a lot of Republicans, as well as most economists, have serious questions about whether the tax makes sense. They cite the country's previous experience with the tax, from 1980 to 1988, and argue that it failed to produce the kind of anticipated government windfall.

This debate is likely to rage through the fall, as Democrats Barack Obama and Hillary Clinton are making the tax a key proposal of their energy plans.

Clinton would use the tax to help pay for summer suspension of the 18.4 cent a gallon federal gasoline tax, while Obama wants to use windfall profit money for consumer tax breaks and subsidies.

Presumptive Republican nominee John McCain has said that he would be "glad to look" at the tax, but many of his GOP colleagues hate the idea.

The tax was imposed in 1980. Oil and gasoline prices were soaring, gas lines were sprouting across the nation, and Carter wanted to remove controls on domestic oil prices.

The tax, he said in 1979, would help the public share in what he thought would be an oil windfall from prices that would inevitably keep rising. His administration estimated that the tax would bring in about $296 billion over 10 years.

Congress created a complex series of tax rates starting in 1980. But Ronald Reagan that year vowed to fight for repeal, and after he became president in 1981, Washington tinkered with the tax repeatedly.

Over its eight-year lifespan, it garnered an estimated $80 billion, a sum held down by declining oil prices, development of new energy sources and higher than anticipated administrative costs.

Tax supporters today maintain that at the very least, a new plan would provide revenues that could help relieve our dependence on foreign energy.

"We believe that Big Oil has a responsibility," said Sen. Charles Schumer, D-N.Y. "And the money that they would pay into the windfall profits tax will go to develop alternative sources of energy."

Obama would tax each barrel of oil costing more than $80, which his advisers think would cut oil industry profits about 10 percent. Clinton says her plan would bring in $9 billion this summer.

Last week, the Republican National Committee ridiculed Obama's initiative, releasing a video, called "Carter-Obama taxes," that features a picture of former President Jimmy Carter discussing his 1979 energy plan. "Is this the kind of change America needs?" the GOP asks.

Some experts see merit in it nevertheless.

"We have a serious problem with the federal deficit, and this could raise some serious revenue," said James Hamilton, professor of economics at University of California, San Diego.

But many economists see drawbacks.

Jared Bernstein, economist at Washington's Economic Policy Institute, a liberal think tank, called the windfall tax a "feel good idea."

More effective, he said, would be "closing loopholes and tax forgiveness...these guys are getting out of paying billions of dollars."

Among his ideas: Stop the "royalty relief" given to oil producers about 10 years ago. When oil companies drill on public land, they're supposed to pay royalties to the government, but Washington gave the firms a break when prices were low-and never repealed it.

Conservative economists contend that the windfall tax is simply unfair. They argue that historically, "windfall profits in the oil sector are figments of the imagination," as Jerry Taylor and Peter Van Doren, senior fellows at the Cato Institute, a libertarian think tank, put it in a recent study.

In the fourth quarter of 2005, the 20 largest investor-owned oil firms earned a collective 8.8 cents on every dollar of sales, they found, far less than a number of other big U.S. corporations.

Windfall tax backers counter that since then, profits have soared-Exxon Mobil alone earned $11.66 billion in the fourth quarter of 2007 and $40.6 billion for the year, both records for a U.S. corporation, largely because of soaring oil prices.

In the first quarter of this year, the company earned $10.9 billion, the second-highest quarterly profit ever. Oil industry leaders say they'll plow their profits into more aggressive exploration and development, necessary to expand supplies for the future.

Still, it seems like an easy target, but it's not, said Muhammad Islam, associate professor of economics at St. Louis University.

"How do you define the word windfall? How do you define 'normal price?'" he asked.

That won't stop the debate, though.

"By proposing this, you're showing your concern about a big issue," said Lance deHaven-Smith, professor of public administration and policy at Florida State University, "even though you're really only offering a simple solution to a more complex problem."


More on the Web::

RNC video criticizing the Obama plan

John McCain discusses the windfall profits tax

Barrack Obama discusses his ideas

Hillary Clinton discusses her ideas