Taking the Wind out of Windfall?

The Tax Foundation maintains that oil companies are paying income taxes commensurate with their increase profits; others say the group's analysis i...
Lisa YoonFebruary 10, 2006

Last year was a good year for oil companies — too good, some in Congress seem to think. Proposals for increased taxes on oil companies, passed in the Senate last fall, are currently being debated in the House.

A study by the Washington, D.C.-based Tax Foundation suggests there’s no need for such legislation. With higher profits, maintains the foundation, came increased income-tax burdens for energy companies. The group points to the federal 35 percent corporate income-tax rate, which — combined with the weighted average of state corporate income taxes — results in a 39.3 percent effective tax rate.

According to the foundation’s study of 2005 quarterly earnings reports by oil companies, ExxonMobil, ConocoPhillips, and Chevron paid a combined $44.3 billion on their reported gross earnings in 2005. That’s 49.2 percent more than in 2004, when they paid a combined $29.7 billion. Last year, adds the report, the three companies also coughed up $114.5 billion in franchise, property, excise, and other taxes.

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Unlike a windfall-profits tax passed (and later repealed) in the 1980s, the legislation being debated in Congress seeks to disallow foreign tax credits as well as certain accounting methods, such as LIFO (last in, first out). The combined effect of these two proposals is “a substantial increase in tax for oil companies,” says Scott Hodge, president of the Tax Foundation and a co-author of the study.

While proponents of more-stringent taxes maintain that tax policy is more generous to oil companies in the United States than abroad, says Hodge, that 39.3 percent figure suggests that U.S. corporate income taxes are actually higher than in most other countries.

Bob McIntyre, director of the Washington, D.C.-based Citizens for Tax Justice, argues that the foundation’s analysis of quarterly earnings reports is misleading. Quarterly earnings reflect all projected taxes, he notes, including taxes that the companies ultimately didn’t pay due to write-offs or tax loopholes. He claims 20 percent is closer to the true figure.

Hodge stands by his numbers, saying McIntyre’s claim “isn’t what the companies are showing in their reports to investors.” Hodge goes further: He maintains that the movement to penalize oil companies for sharply higher profits reflects opportunism by politicians who are seeking “to take advantage of an unpopular industry” when public sentiment is against it.

It’s true, though, that quarterly reports show the current provision for tax (an amount the company has already paid tax authorities) as well as a deferred provision (an amount it anticipates paying in the future). Typically, a company pays less than the amount indicated in the deferred provision, either due to favorable resolutions of uncertain tax positions or for other reasons. “Since we don’t have access to their tax returns, it’s hard to know” how much of the anticipated amount a company ultimately pays, acknowledges Hodge.

“As long as companies are paying their 35 percent, everything’s dandy,” concludes McIntyre. Otherwise, “a windfall tax is a good second-best approach to make sure companies pay their full share.”