? _ RL34689 - Oil Industry Financial Performance and the Windfall Profits Tax
30-Sep-2008; Salvatore Lazzari, Robert Pirog; 25 p.

Abstract: Over the past 10 years, surging crude oil and petroleum product prices have increased oil and gas industry revenues and generated record profits, particularly for the top five major integrated companies (also known as the “super-majors”): Exxon- Mobil, Royal Dutch Shell, BP, Chevron, and Conoco/Phillips. These companies, which reported a predominant share of those profits, generated more than $100 billion in profits on nearly $1.5 trillion of revenues in 2007. From 2003 to 2007, revenues increased by 51%; net income (profits) increased by 85%. Oil output by the five majors over this time period declined by more than 2%, from 9.85 to 9.63 million barrels per day. Being largely price-driven, with no increase in output, and with little new production resulting from increased oil industry investment, many believe that a portion of the increased oil industry income over this period represents a windfall and unearned gain, i.e., income not earned by any additional effort on the part of the firms, but due primarily to record crude oil prices, which are set in the world oil marketplace.

Numerous bills have been introduced in the Congress over this period to impose a windfall profits tax (WPT) on oil. Most of the bills were introduced in the 109th and 110th Congresses, after the enactment of the Energy Policy Act of 2005, which provided oil and gas industry tax incentives, in addition to the industry’s traditional tax subsidies. An excise-tax based WPT would tax only domestic production, and like the one in effect from 1980-1988, would increase marginal oil production costs, which theoretically could reduce domestic oil supply, and raise petroleum imports, making the United States more dependent on foreign oil, undermining goals of energy independence and energy security. By contrast, an income-tax based WPT would be more economically neutral (less distortionary) in the short-run: sizeable revenues could be raised without reducing domestic oil supplies. Neither the excisetax based or income-tax based WPT are expected to have significant price effects: neither tax would increase the price of crude oil, which means that refined petroleum product prices, such as pump prices, would likely not tend to increase.

In lieu of these two types of WPT, an administratively simple way of increasing the tax burden on the oil industry, and therefore recouping some of any excess or windfall profits, particularly from major integrated producers, would raise the corporate tax rate by, for instance, repealing or reducing the domestic manufacturing activities deduction under IRC § 199. This deduction is presently 6% of a firm’s net income) and is available generally to all domestic manufacturing businesses (service firms are excluded), including almost all oil firms. Repealing this deduction for the major integrated oil companies, and freezing it at 6% for the remaining qualifying oil companies is estimated by the Joint Committee on Taxation to generate about $10 billion over 10 years. [read report]

Topics: Natural Resources, International Finance

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