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Thursday, August 07, 2008

Windfall profits taxes on energy companies?

Here's a current affairs multiple choice question that is dirt simple:

For the second quarter of 2008, two highly pertinent financial figures reported by ExxonMobil were its net income (as calculated according to U.S. GAAP, i.e., generally accepted accounting principles) and the taxes it paid. Which of the following statements is true?

  1. ExxonMobile's net income was $32.4 billion. It paid income taxes and other taxes totaling $11.7 billion.

  2. ExxonMobil's net income was $11.7 billion. It paid income taxes and other taxes totaling $32.4 billion.

Statement No. 2 is true, and Statement No. 1 is false. In fact, as an American corporation that therefore is already burdened with one of the highest corporate income tax rates among its global competitors, ExxonMobil paid $10.5 billion in income taxes alone.

If you don't understand that ExxonMobil is already paying roughly three times as much in taxes as it makes in profits, then you're very likely to be suckered by stories like this one in the New York Times, which only reports on the record-setting profits, and not on the record-setting taxes. And you're also very likely to be suckered by political candidates who call for "windfall profits taxes," as if politicians — politicians! — are oh so very much smarter than the market, such that they can decide which industries are enjoying "windfalls" that can be taxed without ill effect on either them or the national economy.

We call that kind of politician a "commissar," by the way.

An American windfall profits tax on energy companies, however, will guarantee certain results: American energy companies will be penalized compared to their foreign competitors, many of whom are already heavily subsidized by their own countries. And American energy companies will have less incentive and less ability to invest, whether in finding new sources of fossil fuel energy upon which we can rely if there are future embargoes or in helping develop alternative energy sources.

Posted by Beldar at 12:31 AM in 2008 Election, Current Affairs, Energy, Obama, Politics (2008) | Permalink


Other weblog posts, if any, whose authors have linked to Windfall profits taxes on energy companies? and sent a trackback ping are listed here:

» POLITICS: Windfall from Baseball Crank

Tracked on Aug 7, 2008 5:36:12 PM

» Yay! It's Palin! from BeldarBlog

Tracked on Aug 29, 2008 11:44:57 AM


(1) Boyd made the following comment | Aug 7, 2008 7:25:29 AM | Permalink

I think it's worth pointing out that "net income" is an after-tax figure. Some folks could look at your presentation and mistake net income for revenue (which was $138 billion) and think that Exxon paid three times as much in taxes as it received in revenues.

(2) kimsch made the following comment | Aug 7, 2008 9:40:45 AM | Permalink

In that same period, GM posted losses of $15.5 billion. Will the Obama administration subsidize "windfall" losses as much as the Obama administration would want to tax "windfall" profits?

What about Obama's own "windfalls" - book money, wife's promotion and nearly triple salary increase just after he became a US Senator?

(3) dchamil made the following comment | Aug 7, 2008 11:19:13 AM | Permalink

Years ago, the late television business reporter Ed Hart remarked on this subject, "If it's profitable, it's windfall profitable!"

(4) A.W. made the following comment | Aug 7, 2008 12:59:34 PM | Permalink

What people should be asking is how the hell Obama expects to tax the oil companies on "windfalls" without them being passed on to the consumers?

There are only two answers? Either they will be, or Obama is going to institute price controls.

(5) Lifeguard made the following comment | Aug 11, 2008 8:32:12 AM | Permalink

Unfortunately, Sarah Palin appears to have approved windfall profits taxes on the oil industry in Alaksa: link.

(6) Beldar made the following comment | Aug 11, 2008 9:19:19 AM | Permalink

Lifeguard, thank you for your comment, but you've been misled.

What the article you linked to is discussing is a severance tax. State severance taxes charged on production of oil and gas and minerals are common throughout the United States. Also sometimes called "production taxes," they're charged by the state from beneath whose land valuable resources are extracted, and they're designed not to punish the energy companies, but to recompense the state for its loss of a non-replaceable resource — one that must be quantified and taxed upon removal, if it is ever to be taxed at all. Severance taxes are therefore based on production from within the state, not on profits earned by the company extracting that production — even though the production may be measured in, and the tax assessed upon, the market value or gross revenues (as measured in dollars) received for that production, rather than an "in kind" delivery to the state in barrels or cubic feet as such. See, e.g., Tex. Tax Code §§ 201.051 & 202.051 (Texas production taxes on gas and oil respectively).

Indeed, I once represented Conoco in a Houston lawsuit against Mobil over how to allocate the severance tax they jointly owed based on jointly owned oil and gas leases in Idaho. There's actually a fair amount of competing case-law from different states over whether severance taxes are more properly characterized as "property taxes" or "income taxes" — if for some reason (e.g., interpreting a sloppy contract) you have to put them into one of those two categories or the other. But in any event, severance taxes are in no way premised on the notion that energy companies are making unconscionable or excessive profits.

Alaska's previous version of its severance tax had been negotiated behind closed doors by defeated Gov. Frank Murkowski, a few top state legislators (some of whom are now in prison for corruption), and energy lobbyists. One of the campaign planks upon which Gov. Palin ran for office was replacing that tax with one negotiated in the open with full transparency; and the resulting tax was, indeed, slightly more favorable to the State of Alaska. The article you linked tells some of this anti-corruption history on the part of Gov. Palin. But just because the newspaper headline writers and some of the people the article quoted used the word "windfall," don't be fooled into thinking that the tax in question is the same thing Barack Obama and the Democrats are now promoting at a national level.

Rather, what Obama and the Dems are promoting is nothing less than selective government confiscation of the property of a particular industry, on the theory that such industry's profits are "excessive." That's a repugnant rabble-rousing scheme, populism turned into class warfare and carried to its excessive worst. It's completely unjustifiable either morally or economically. Its short-term victims are going to be energy-company shareholders (which include huge numbers of pension plans in which ordinary Americans have investments), but its long-term victims will be all Americans (who will suffer as our own energy companies are put at an increasing competitive disadvantage compared to others in the world, and whose national security interests will be further harmed as we become even more dependent on foreign sources of fossil-fuel energy).

(7) Lifeguard made the following comment | Aug 11, 2008 12:11:00 PM | Permalink

Thanks for explaining, Beldar! I was indeed suckered by the word "windfall" in the HotAir link.

(8) Beldar made the following comment | Aug 11, 2008 3:23:17 PM | Permalink

Lifeguard, thanks for that link too — I hadn't seen Cap'n Ed's post at Hot Air, but I've sent him the following email:


I’m pretty sure your post on Gov. Palin supposedly having supported a “windfall profits” tax in Alaska is badly misinformed. I think you’ve been suckered by taking the Seattle newspaper article at face value. I would not be surprised if this article is a plant by Dems who are terrified that McCain MIGHT pick Palin.

The tax in question is Alaska’s SEVERANCE tax, which is not a general corporate income tax, but a one-time tax that most states impose on the extraction of non-renewable resources that otherwise would escape taxation. I’m not an expert on tax law, but I have had a prior case involving state severance taxes, and I discuss the difference in a comment on my blog: link.

You also need to understand the context: The prior severance tax was negotiated behind closed doors between the three big oil companies who (to the exclusion of others) dominate existing production — ExxonMobil, BP, and ConocoPhillips — and the corrupt former legislators (some of whom are now in prison) and discredited administration of former Gov. Frank Murkowski (whom Palin defeated). Palin insisted on renegotiating the severance tax in open meetings with complete transparency. The result was indeed a slight increase — but only from a base rate of 22.5% to 25%. link

In other words, Palin brought SUNSHINE to the process. That did indeed upset those three big oil companies, who were happier in the dark. They’re also pissed because she’s championing an open-bidding process for a new natural gas pipeline that will bring affordable energy to Alaskans as well as making its natural gas reserves eventually available to the lower 48 states. (A Canadian-based company won that bid after ExxonMobil, BP, and ConocoPhillips refused to participate, but they’re promoting their own alternative deal. The Alaska legislature’s in special session to sort things out.)

Gov. Palin’s constituents, however, follow this stuff closely because it is so integral to the state’s entire budget and governing processes. Gov. Palin’s approval ratings are still at 80% as of the end of July.

The quote adding in royalty payments to the tax burden is extremely misleading. Producers pay royalty payments wherever they extract oil, gas & minerals. If you check, I think you’ll find that the royalty payments actually go to the federal government, not the Alaska state government, under the terms of the deal reached when Alaska became a state.

Costs of living are dramatically higher in Alaska than elsewhere. The local state tax burden is already comparatively low, however. Because of current energy prices — not specifically because of this modest increase in the severance tax — Alaska is in a position to rebate government money to its citizens. They’re choosing to do so by direct payments rather than cutting taxes. But since their entire state budget is already (and has long been) based on the development of Alaska’s energy reserves, it’s not at all fair to compare that rebate program to the confiscate-and-giveaway class warfare that Obama is proposing.

I write this to encourage you to actually research this more thoroughly, perhaps by contacting someone who IS a state tax expert and knows the state history better than I do. I don’t have time to do a more thorough analysis today or tomorrow, but if you choose not to, I’ll try to do so later this week. If you want to quote (with or without attribution) anything from this email in the meantime, feel free, but please be sure to include my statement that this is a “top of my head” reaction.

- Beldar

And I followed that with this email:


Re-reading what I just sent, I’m particularly uncertain about royalty rights. It may be that they’re divided in some proportion between the state and federal governments. So that paragraph in particular probably ought not be quoted without some further inquiry. But it is fair to say that oil companies pay royalties to SOMEONE on essentially all production, and it’s not fair to characterize those royalties as being part of anyone’s “windfall profits tax.”

- Beldar

What's next is from the description from the universally respected CCH looseleaf tax service, as linked in my first email, of the legislation in question:

The base tax rate is increased from 22.5% to 25% of the annual production tax value of taxable oil and gas. When a producer's average monthly production tax value per BTU equivalent barrel of taxable oil and gas is between $30 and $92.50, an additional tax of 0.4% is imposed on the difference between the average monthly production tax value and $30. Formerly, the additional tax was 0.25%. When a producer's average monthly production tax value exceeds $92.50, the additional tax is 0.1% of the difference between the monthly production tax value and $92.50. The new tax rates are effective July 1, 2007.

That's not remotely consistent with what the Seattle newspaper article says, but I'd put my money on CCH.

I suspect the entire Seattle newspaper article needs a vigorous fisking. It reads to me like a hatchet job.

(9) bc3b made the following comment | Aug 11, 2008 8:57:54 PM | Permalink

Beldar -

Thanks for clarifying this. Ed Morrissry picked up this story verbatum from the Seattle Times. I agree, it sounds like a "hit job." There's nothing the big oil companies would like to do is destroy Sarah Palin. She's one of few Alaskan officials they don't own.

Alaska made $10 billion in oil revenues last year, according to information in the article Morrissey quoted. Lee Raymond, former Exxon-Mobil CEO was given a retirement package worth $400 million (by a board he appointed) when he retired.

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