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Commentary

Stealth Tax on Oil Would Hit Investors, Nation


     
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You’re an investor, so imagine this nightmare.

You do careful research and identify a company with top-quality management that shows the potential for significant increases in value. A few years later, the corporation you invested in merges with another.

As a result of restructuring, operations are streamlined and costs are reduced. The company’s improved financial position allows it to invest in new technology and improve its competitive position worldwide.

Sure enough, the risk you took is rewarded as the company’s earnings increase.

Now, however, the government steps in and claims that your company is too profitable. Even though its profitability is well below that of companies in many other industries, and even though management is plowing more money than before into new production, research and development, a tax is imposed that strips the company of much of its higher earnings—and confiscates much of the value that you and other investors are entitled to share.

Unfortunately, this is exactly the way some investors will be treated if a budget bill passed last September by the U.S. Senate becomes law. The misnamed Tax Relief Act of 2005 singles out the five largest U.S. oil companies for punitive taxation, even as they’re still trying to recover from last summer’s extensive hurricane damage to oil-and-gas facilities in the Gulf of Mexico.

Although the House version of the budget bill contains no such provisions, the issue is now in the hands of the conference committee, where anything can happen.

If you are among the millions of Americans who hold oil stocks in pension funds or other retirement accounts, brace yourself. The financial impact of the Senate bill would be dramatic: Mutual funds and retirement accounts own approximately $270 billion worth—40 percent—of outstanding oil company stock.

Most Americans assume that the "windfall" profits tax, which Congress rejected last year, is a dead issue. But the Senate bill in reality is a back-door way of imposing that kind of tax on the oil companies, and it would affect the pocketbooks of millions of ordinary people.

Here’s how the stealth tax would operate. One of the bill’s provisions would eliminate the ability of large oil companies to take a credit for corporate income taxes paid to foreign governments. Never mind that the same credit has been available to all American taxpayers since income taxes were imposed in 1913.

Eliminating the credit means that the major oil companies would be taxed twice on the same income. That would place U.S. oil companies at a disadvantage in competing with foreign national oil companies and other foreign producers for oil and gas reserves.

Another provision would ban the further use by the five oil companies of an accounting procedure that all U.S. manufacturers have used for some 70 years. It would require them to arbitrarily increase the value of their oil inventories, raising their taxes by an estimated $5 billion over the next two years. The effect would be to reduce the amount of capital available for expanding refinery capacity and developing new energy resources.

Tax policies that tilt the playing field against major U.S. oil companies threaten our nation’s security at a time when supply disruptions in any number of oil-producing countries could halt the flow of oil. The Senate is telling us—and telling the world—that in the critical period immediately ahead America will make it more difficult for its largest oil companies to deal with our central energy problem, which is a shortage of oil production and refining capacity, both at home and abroad.

Ensuring that we have sufficient oil and gas supplies in the years ahead will require massive investment. The International Energy Agency estimates that industry will need to spend an average of $200 billion each year between now and 2030 to meet growing oil and gas needs.

But unless Congress comes to its senses soon, the needed funds won’t be available because investors will have taken their money elsewhere.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.


  From William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation?






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