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'Backdoor windfall tax' stirs the pot
Provision in Senate tax bill riles the oil industry and its supporters on the Hill.
November 17, 2005: 9:59 AM EST
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) There's been a heated debate going on around the Beltway about whether to impose a "windfall profit tax" on the oil industry, which has profited handsomely from soaring oil prices earlier this year.

But in a surprising and contested move, Sen. Charles Grassley (R-Iowa) included in a Senate Finance Committee tax bill a provision that some have characterized as a 'backdoor windfall tax' on large oil companies. The committee, which Grassley chairs, passed the bill Tuesday evening. And it is being debated on the Senate floor Thursday.

The Joint Committee on Taxation estimates the provision would raise an additional $5 billion in tax revenue in 2006 and 2007. That would help compensate for the revenue lost by the nearly $60 billion in tax breaks also included in the bill.

The provision included in the Senate Finance tax bill doesn't explicitly tax excess profits but rather would change the way the inventories of the largest integrated oil companies are valued. The net effect would be a hike in their taxable income, thereby reducing the profits they pocket.

An integrated oil company is one that explores and refines oil and gas, and which also may serve as a retailer of oil and gas products. Think Exxon Mobil.

Last year, the seven largest integrated oil companies listed on the S&P 500 earned $50.8 billion in net income. This year, they are expected to earn $69.2 billion in net income, according to estimates from Thompson Financial. And in 2006, their net income is estimated to increase to $75 billion.

Opponents of a windfall profit tax on integrated oil companies contend that it's both unfair and unproductive because it would discourage the companies from investing in infrastructure and exploration.

For one thing, said Fadel Gheit, an oil stock analyst for Oppenheimer & Co., since the provision only targets the largest companies, "it's not a uniform tax. It's like taxing the very super-rich."

What's more, he said, "The tax code isn't supposed to penalize investment. It's supposed to encourage investment."

It's also a political move, Gheit contends. At a time when they're gearing up for re-election in 2006, lawmakers who support such a move appear compassionate to the gas-buying, home-heating-bill-paying voters.

But the move, he said, "won't lower gas prices even a penny."

Economist Dean Baker agrees, noting that a windfall profit tax doesn't directly affect supply and demand in the market.

But a major reason to impose a windfall tax now, Baker said, is that the rise in oil prices "is kind of (the oil companies') good luck. They didn't do anything to earn it. And we're sitting here with a $150 billion bill from Katrina."

Meanwhile, a number of lawmakers, including Sen. Olympia Snowe (R-Maine) who introduced the inventories provision into the Senate bill, and Grassley himself, have called on oil companies to donate some of their profits to boost heating subsidies to aid low-income Americans who can't afford their heating bills.

Whether lawmakers will continue to pursue ways to tap oil companies' profits will depend on the price of oil and gas in the coming weeks, Baker said. If they continue to come down, as they have been doing, that should relieve some of the pressure.

As might a continuation of unseasonably warm temperatures in the Northeast, Gheit said.

The chance that the inventories provision in the Senate bill will make its way into law seems a long shot at this stage.

According to a report Wednesday in "Tax Notes," a publication of publisher Tax Analysts, Grassley has already agreed to review the economic effects such a move would have in response to critics specifically, Republican committee members who are opposed to the provision and want it removed from any legislation voted on by the full Senate.

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For a look at oil company executives' testimony about their profits before lawmakers on the Hill earlier this month, click here. And for a look at key questions facing oil companies, click here.  Top of page

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