Taxing the oil companies' excesses

Last October, 12 U.S. senators sent a letter to nine major oil companies, asking them to donate part of their record profits to help poor Americans faced with large increases in their heating oil costs this winter.

Only one oil company --CITGO, owned by the government of Venezuela -- responded.

CITGO has now established programs to supply heating oil to low-income communities in Boston, New York City, Maine, and Rhode Island, at discounts of up to 40 percent.

Given the record oil profits taken in by U.S. companies --ExxonMobil, the largest, raked in nearly $10 billion in profits in just the third quarter -- it is amazing that they did not have enough sense of public relations to spend just a small fraction of 1 percent of their profits for something like this.

But Americans do not have to rely on voluntary contributions by the oil companies.

Our government has the power to tax U.S. corporations, and a "windfall profits tax" has been used before in situations where this industry is drowning in a sea of cash.

Such a tax would be temporary -- maintained only while high oil prices permit unusually high profits -- but it could generate substantial revenue.

The latest (third quarter) numbers show our oil industry profits running at a $70.8 billion annual rate. The average over the last five years was just $24.3 billion, leaving a windfall profit of $46.5 billion.

If we were to seize just half of that excess profit, it would generate $23 billion in tax revenue. This is about 1 percent of our federal budget and could do quite a bit more than provide discounted heating oil to those who are hard-hit by price increases this winter.

The main economic argument put forth against such a tax is that it would discourage oil companies from further exploration and development.

But a tax on current windfall profits would be unlikely to have such an impact. Oil was less than $25 a barrel in 2002, and less than $15 a barrel as recently as 1998 -- as compared to $62 today. Yet oil companies found it profitable to invest in the production that we see today when they expected prices well under half of what they have turned out to be. So a temporary excess profits tax would still leave them much richer than if there had not been this unexpected surge in prices.

Even if these prices were to remain at current levels or to rise further, there would be little effect on incentives. As oil became more expensive to obtain, profits and the windfall tax revenue would both decline, limiting its impact on incentives. Of course, we will eventually have to switch away from oil anyway, due to the threat from global climate change. Given this situation, it makes more sense to provide incentives for alternative energy sources, rather than the maximum possible incentive for exploiting the most costly petroleum resources.

Furthermore, we need the tax revenues.

The reconstruction costs from Hurricane Katrina are now about $85 billion. This would push estimates of the federal budget deficit up to more than $400 billion, as commonly reported -- or closer to $600 billion (5 percent of GDP) if we include, as we should, borrowing from Social Security.

Of course there are bigger structural problems that have been pushing our gross federal debt to more than 67 percent of GDP, the highest in half a century.

These are the war in Iraq (which has cost over $250 billion so far) and tax cuts directed toward high income groups. But a tax on excess oil industry profits would still be a significant step in the right direction.

Mark Weisbrot and Dean Baker are co-directors of the Center for Economic and Policy Research, in Washington, D.C.