Windfall Accounting Tax

BrooklynBound · 11-30-2005, 08:45 AM

Just when you think Congress can't possibly be more destructive, the Members surprise you again. Their latest doozy is a backdoor windfall profits tax on oil companies that was stuffed into the Senate budget reconciliation before Thanksgiving.

The Senators had a chance to declare themselves in public on the windfall levy, but they sensibly voted against it on the floor, 64 to 35. In a democracy, that should have settled the matter for this year. But this is the world's greatest cynical body, where the grasping for tax revenues to dole out to constituents never ends. So a pair of our most dangerous Senators -- New York Democrat Chuck Schumer and Maine Republican Olympia Snowe -- insisted on the addition of a nasty little provision into the tax reconciliation bill.

The last time Congress imposed a form of the windfall tax was the final gloomy days of Jimmy Carter, and the result was: a substantial reduction in domestic oil production (about 5%), thus raising the price of gas at the pump; and a 10% increase in U.S. reliance on foreign oil. A windfall profits tax is the ultimate act of economic masochism because it taxes only domestic production, while imports and foreign oil subsidiaries bear almost none of the cost.

But wait, this time it's worse. The current Senate proposal would actually require oil companies with daily production of 500,000 barrels or more to disregard generally accepted accounting principles, by revaluing their oil inventories. GAAP accounting (and current tax law) allows oil firms to value barrels of oil sold at what it costs to replace that barrel.

The Senate bill would require the companies to revalue their inventories by $18.75 a barrel -- an arbitrary number if there ever was one. In effect, this means that Congress is creating the illusion of higher oil profits, and thus raising the tax liability of oil companies by an estimated $5 billion next year. This would be on top of the 35% tax rate they already pay on their actual profits.

When Andy Fastow tried to create phony profits at Enron, he got 10 years in the slammer. Now Senators want to create phony corporate profits, so they can grab them to spend. Where's Eliot Spitzer when you really need him? What's even more reprehensible about this revenue grab is its retroactive nature. In a sense this is less a tax than it is an ex post facto confiscation of private property.

Because this is a one-time inventory adjustment for taxes paid in 2006, supporters claim the tax will be no disincentive to future production or reserves. Try that one again. If oil companies believe that their profits will be sliced any time there is a spike in oil prices, their incentive to hold reserves in anticipation of higher future prices is vastly diminished. It is precisely when supplies are curtailed and prices are high that we want oil companies to have plentiful reserves. It was the profit motive, so maligned on Capitol Hill, that helped ensure that the "oil crisis" that followed Katrina's blow to Gulf refineries was surprisingly mild and short lived.

Both Republicans and Democrats also say that what troubles them is that the oil companies aren't investing enough of their profits in new refineries, or new oil exploration and production in the U.S. Hello? Explore where? Even with $60 oil and $12 natural gas, Congress refuses to open more of Alaska or the Outer Continental Shelf to new drilling. The Senate recently rejected a House-passed measure that would reduce regulatory hurdles to building new refineries. The oil companies aren't investing more in domestic refineries and exploration for one simple reason: Congress won't let them.

We hope that the citizens of Maine and New York recognize that their distinguished Senators are doing everything in their power to keep gasoline prices high and home heating bills rising this winter. These are also the Senators who are demanding billions of dollars more in taxpayer subsidies so their constituents can afford the higher utility bills that these same Senators have helped to ensure.

The good news is that the House version of reconciliation doesn't include this windfall accounting scam, and the White House is threatening a veto if it isn't removed in conference. Senator Snowe has so consistently undermined the GOP agenda this year that she is the last person who should be rewarded now with a political victory. But it speaks volumes about the policy implosion of this Congress that such destructive legislation has made it this far.

jets5ever · 11-30-2005, 08:51 AM

So dumb, so very, very dumb.

I can understand the grandstanding. You know, calling oil guys out and raking them over the coals. The Great Unwashed loves their circuses, and these politicians can preen and scold and act as though they "care" about "working people" and all that. That's fine. Bread and circuses, I get all that. I just thought they'd be smart enough to not take it seriously and have it just be a publicity stunt. This type of thing makes me worry. They really are as stupid as they seem.

"Price gouging" and "windfall profits" taxes - are people kidding me?

quantum · 11-30-2005, 08:54 AM

[QUOTE=jets5ever]So dumb, so very, very dumb.

I can understand the grandstanding. You know, calling oil guys out and raking them over the coals. The Great Unwashed loves their circuses, and these politicians can preen and scold and act as though they "care" about "working people" and all that. That's fine. Bread and circuses, I get all that. I just thought they'd be smart enough to not take it seriously and have it just be a publicity stunt. This type of thing makes me worry. They really are as stupid as they seem.

"Price gouging" and "windfall profits" taxes - are people kidding me?[/QUOTE]

My sentiments exactly. Nice.

11-30-2005, 08:45 AM	#1
BrooklynBound Hall Of Fame Join Date: Jan 2005 Posts: 15,550	Windfall Accounting Tax Just when you think Congress can't possibly be more destructive, the Members surprise you again. Their latest doozy is a backdoor windfall profits tax on oil companies that was stuffed into the Senate budget reconciliation before Thanksgiving. The Senators had a chance to declare themselves in public on the windfall levy, but they sensibly voted against it on the floor, 64 to 35. In a democracy, that should have settled the matter for this year. But this is the world's greatest cynical body, where the grasping for tax revenues to dole out to constituents never ends. So a pair of our most dangerous Senators -- New York Democrat Chuck Schumer and Maine Republican Olympia Snowe -- insisted on the addition of a nasty little provision into the tax reconciliation bill. The last time Congress imposed a form of the windfall tax was the final gloomy days of Jimmy Carter, and the result was: a substantial reduction in domestic oil production (about 5%), thus raising the price of gas at the pump; and a 10% increase in U.S. reliance on foreign oil. A windfall profits tax is the ultimate act of economic masochism because it taxes only domestic production, while imports and foreign oil subsidiaries bear almost none of the cost. But wait, this time it's worse. The current Senate proposal would actually require oil companies with daily production of 500,000 barrels or more to disregard generally accepted accounting principles, by revaluing their oil inventories. GAAP accounting (and current tax law) allows oil firms to value barrels of oil sold at what it costs to replace that barrel. The Senate bill would require the companies to revalue their inventories by $18.75 a barrel -- an arbitrary number if there ever was one. In effect, this means that Congress is creating the illusion of higher oil profits, and thus raising the tax liability of oil companies by an estimated $5 billion next year. This would be on top of the 35% tax rate they already pay on their actual profits. When Andy Fastow tried to create phony profits at Enron, he got 10 years in the slammer. Now Senators want to create phony corporate profits, so they can grab them to spend. Where's Eliot Spitzer when you really need him? What's even more reprehensible about this revenue grab is its retroactive nature. In a sense this is less a tax than it is an ex post facto confiscation of private property. Because this is a one-time inventory adjustment for taxes paid in 2006, supporters claim the tax will be no disincentive to future production or reserves. Try that one again. If oil companies believe that their profits will be sliced any time there is a spike in oil prices, their incentive to hold reserves in anticipation of higher future prices is vastly diminished. It is precisely when supplies are curtailed and prices are high that we want oil companies to have plentiful reserves. It was the profit motive, so maligned on Capitol Hill, that helped ensure that the "oil crisis" that followed Katrina's blow to Gulf refineries was surprisingly mild and short lived. Both Republicans and Democrats also say that what troubles them is that the oil companies aren't investing enough of their profits in new refineries, or new oil exploration and production in the U.S. Hello? Explore where? Even with $60 oil and $12 natural gas, Congress refuses to open more of Alaska or the Outer Continental Shelf to new drilling. The Senate recently rejected a House-passed measure that would reduce regulatory hurdles to building new refineries. The oil companies aren't investing more in domestic refineries and exploration for one simple reason: Congress won't let them. We hope that the citizens of Maine and New York recognize that their distinguished Senators are doing everything in their power to keep gasoline prices high and home heating bills rising this winter. These are also the Senators who are demanding billions of dollars more in taxpayer subsidies so their constituents can afford the higher utility bills that these same Senators have helped to ensure. The good news is that the House version of reconciliation doesn't include this windfall accounting scam, and the White House is threatening a veto if it isn't removed in conference. Senator Snowe has so consistently undermined the GOP agenda this year that she is the last person who should be rewarded now with a political victory. But it speaks volumes about the policy implosion of this Congress that such destructive legislation has made it this far.

11-30-2005, 08:51 AM	#2
jets5ever Hall Of Fame Join Date: Apr 2003 Location: Boston Posts: 11,692	So dumb, so very, very dumb. I can understand the grandstanding. You know, calling oil guys out and raking them over the coals. The Great Unwashed loves their circuses, and these politicians can preen and scold and act as though they "care" about "working people" and all that. That's fine. Bread and circuses, I get all that. I just thought they'd be smart enough to not take it seriously and have it just be a publicity stunt. This type of thing makes me worry. They really are as stupid as they seem. "Price gouging" and "windfall profits" taxes - are people kidding me?

11-30-2005, 08:54 AM	#3
quantum GFY Snatchez! Hall Of Fame Join Date: Nov 2004 Location: LI Posts: 17,877	[QUOTE=jets5ever]So dumb, so very, very dumb. I can understand the grandstanding. You know, calling oil guys out and raking them over the coals. The Great Unwashed loves their circuses, and these politicians can preen and scold and act as though they "care" about "working people" and all that. That's fine. Bread and circuses, I get all that. I just thought they'd be smart enough to not take it seriously and have it just be a publicity stunt. This type of thing makes me worry. They really are as stupid as they seem. "Price gouging" and "windfall profits" taxes - are people kidding me?[/QUOTE] My sentiments exactly. Nice.