Oil firms' taxes spur arguments

As Bay Area refinery owners fight for reduction of assessments, some want levy on windfall profits

By Rick Jurgens

CONTRA COSTA TIMES

Governments vigorously tax oil companies for the same reason legendary criminal Willie Sutton robbed banks: “Because that's where the money is.”

Take the owners of the five East Bay refineries. As a group, Chevron, Shell, ConocoPhillips, Valero and Tesoro posted 2005 profits of more than $58 billion, as soaring fuel prices boosted their total sales to $859 billion.

A portion of that money went to finance the operations of governments. The five companies paid $41 billion in income taxes in the United States and other nations during 2005, according to company financial filings.

Those companies also handed over to governments $112 billion in other taxes — mostly sales and excise taxes. Jonathan Williams, an economist with the pro-business Tax Foundation, said that the oil companies “are bearing a very substantial load, not only in dollar terms but percentage terms as well.”

But with so much money at stake, oil company taxation is a frequent source of controversy — even at the local level. For example, four East Bay refinery owners — Chevron, Shell, ConocoPhillips and Valero — are currently battling with local officials over millions of dollars in property tax liabilities. The refiners seek a cut of as much $39 million from their $66 million annual property tax tabs in Contra Costa and Solano counties.

With profits mounting, some lawmakers and oil company critics think that oil companies can and should pay more. “Even the president has said the country is addicted to oil,” said Tyson Slocum, a researcher with Public Citizen, a Washington, D.C.-based consumer advocacy organization. Dealing with that addiction will require spending on conservation, research and development of new fuels, and mass transit, he says.

Since energy crises in the 1970s highlighted America's dependence on oil imports and vulnerability to price spikes, tax policy has also become an arena for competition between proponents of competing energy strategies. A recent study by the Library of Congress' Congressional Research Service observed that energy taxes reflected the politics of competing political, economic, bureaucratic and academic interest groups. Energy tax policy “does not generally, if ever, adhere to the principles of economic, or public finance, theory,” the study found.

That all adds up to a recipe for tax rules that even leave experts scratching their heads. “Energy taxation is one of the most complicated areas of tax policy,” said Williams, the Tax Foundation economist.

Historically, lawmakers have often sought to use energy tax policy to encourage companies to find and produce more oil and gas. But sometimes the results have startled the policymakers.

Recently, legislators from both sides of the aisle have reacted with outrage to reports that oil companies could pocket more than $76 billion that would normally have been paid as royalties for natural gas extracted from federal property. That windfall can be traced back to a law passed in 1995 that sought to encourage development of natural gas resources during a period of low energy prices. It suspended royalty collections on wells drilled in deep coastal waters.

After the law was passed, the U.S. Interior Department signed contracts that allowed companies to keep the royalties only so long as energy prices remained below certain ceilings. However, soaring prices and contracts signed in 1998 and 1999 that inexplicably omitted the ceilings have boosted the value of the incentives. Existing arrangements will divert $17 billion from the treasury, and a pending lawsuit that challenges the price ceilings in all the contracts could cost another $59 billion, the Government Accountability Office recently estimated.

As that example shows, oil companies have demonstrated the political clout and accounting expertise to more than hold their own in the energy policy arena. Yet these days, consumer frustration with high fuel prices and anger at mounting oil company wealth have prompted politicians to take on the oil giants.

The U.S. government taxes the profits of oil companies at the same rate as other corporations: 35 percent. Some state and local governments also tax income, as do foreign governments in countries where multinational firms like Chevron, Shell and ConocoPhillips operate.

Critics think a greater portion of oil company profits should be tapped to finance those efforts. “We're not talking about ending the ability of the companies to be profitable,” said Slocum of Public Citizen. “We're just asking them to contribute a bigger share to making these investments.”

Politicians have responded with proposals to tax so-called windfall profits. During the current session of Congress, nine members of the House and five senators have filed a total of 16 bills that would impose temporary or permanent windfall profits taxes on oil or gas producers.

So far, none has made much headway in the Republican-controlled Congress. But there is more than one way to sock it to an oil giant. Tax legislation now awaiting action by a House-Senate conference committee includes a change in inventory accounting rules that would add $4.3 billion to the tax tab of some large oil companies. However, the measure's sponsor, Sen. Chuck Grassley, R-Iowa, the chairman of the Senate Finance Committee, has acknowledged that opposition in the House makes it unlikely that the provision will be written into law this year.

States also seek ways to take a bite out of oil company windfalls. In California, Assemblyman Johan Klehs, D-Hayward, has led the charge to target oil companies for additional taxation. In January, the Assembly defeated, in a 43-28 vote, his proposal for a temporary 2.5 percent tax on windfall profits of oil producers and refiners. That bill defined as a windfall any profits that exceeded average profits over the five previous years — if those excess profits grew more quickly than fuel sales.

The tax would have raised $140 million in the current fiscal year, and smaller amounts in the two succeeding years, according to the state Franchise Tax Board. Passage would have required a two-thirds vote and the governor's signature.

Not easily discouraged, Klehs quickly introduced a new windfall profits bill. This one, a surtax on all profits above $10 million, would raise an estimated $120 million in its first year, and $190 million two years out, according to Rebecca Marcus, a spokeswoman for Klehs. This month, in a move that lowered the vote required for passage to a simple majority, Klehs amended his bill to allocate the revenue to subsidize prescription drugs for low- and moderate-income seniors, Marcus said. A hearing on the bill is set for April 24.

Some countries and states have sought to tie taxes to the production and sale of crude oil and gas. At least 27 states collect so-called severance taxes on oil producers, including Texas with 2003 revenue of $1.5 billion and Alaska with $1.1 billion in revenue, according to the Independent Petroleum Association of America, a trade group for oil well owners and operators.

Although California is the nation's third-largest producer of oil, it has no severance tax. And although the state did collect $214 million in property taxes from oil producers in 2003, that trailed the severance tax revenue of $481 million in Louisiana, $572 million in New Mexico and $601 million in Oklahoma — each a state that produced less than half California's volume of oil.

A ballot initiative currently being circulated for signatures would impose a tax ranging from 1.5 percent to 6 percent on the gross value of oil produced in California. The tax would be applied to oil from all but the smallest wells, about 165 million barrels annually, and the revenue, which the Legislative Analysts' Office estimates would range from $200 million to $380 million annually, would be spent on alternative energy research and development.

Oil companies and anti-tax groups have denounced the initiative and argued that it would increase the cost of fuel. Backers have responded by releasing poll results showing public support for higher taxes on oil companies and more investment in alternative energy.

Rick Jurgens covers energy and business. Reach him at 925-943-8088 or at [email protected].

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