Laments Defeat of Windfall Profit Tax

Screencap of from June 10, 2008 |"Republicans Block Taxes on Big Oil Profits" blares the teaser headline on the front page of Under a graphic of the Capitol dome and a fuel gauge nearing empty, the caption reads "Senate GOP Stops Dems' Effort To Rein In Profits Of Largest Oil Companies As Gas Prices Soar."

That's a lot of bias packed into 24 words, and that's before the reader gets to the actual article. Notice the lack of cynicism as to the motive of the Democrats, who are painted on the side of consumers against industry, although the primary beneficiary of a windfall tax would be, well, the Democratic Congress.

There are limits to what you can properly communicate in a headline, but a more neutral treatment might have been: "Republicans Block Advance of Oil Profit Tax: Democrats say tax will encourage alternative fuel research, Republicans argue it will worsen energy problems."

In the AP/CBS article itself, oil industry claims that a windfall tax is counterproductive were summarily dismissed with a populist soundbite by a Democratic politician:

The American Petroleum Institute, which represents the major oil companies, has been reminding lawmakers that in the early 1980s, when the government imposed windfall profits taxes on oil companies domestic oil production dropped and imports increased.

But Democrats reject the comparison.

"If you don't tell the big oil companies they can no longer run energy policy in America, we will not succeed, plain and simple," Sen. Charles Schumer, D-N.Y., told CBS Radio News.

What the AP didn't do was examine the factual record to see whether the API was correct about the failure of windfall profits taxes in the 1980s.

As the Tax Foundation noted in 2005, the previous windfall profits tax resulted in decreased domestic oil production and failed to rake in the revenue that the federal government anticipated. What's more, the Foundation found, the federal government already rakes in billions more in fuel excise and corporate taxes on energy companies than those companies earn in profits (see figure below):

Tax Foundation graphic |

Consulting the Tax Foundation would also have been a wise move for the AP for this additional reason: the tax policy think tank predicted the disaster that would ensue from windfall profits taxes back in 1979 when the idea was working its way through Congress.:

The Windfall Profits Tax will directly reduce the supply of domestic crude both by reducing the profitability of the oil industry and also by setting a precedent for taxing perceived large gains of individual investors which can be politically and administratively labeled windfalls. It is estimated that decontrol of oil prices would increase gross revenues of the oil industry by an average of $12 billion per year before taxes. After payment of existing taxes and royalties, estimated net revenues to producers will increase less than $6 billion with no windfall tax.

And proving that there's nothing new under the sun when it comes to liberal tax-and-spend solutions, the justification for the tax back in 1979 was, you guessed it, developing alternative fuels:

Revenues from the tax would be placed in a special trust fund, called the Energy Trust Fund, in the U.S. Treasury. The President and Administration spokesmen have proposed that receipts from the tax be devoted to a wide range of expenditures, especially focusing on synthetic fuels, mass transit, special assistance to the poor to help pay for higher fuel bills, and the like. Attempts have been made to garner support for the tax from those who would benefit from these expenditures. However, the House-passed bill makes no such necessary link between tax receipts and expenditures. Use of the Energy Trust Fund is left up to future authorization and appropriation acts. In other words, Congress can spend the funds any way it wishes-including direct and indirect expenditures for programs unrelated to energy.

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