Pennsylvania lawmakers will be back in Harrisburg in mid-September to revisit the severance tax, which lawmakers agreed to pass as part of the budget deal that was struck nearly two months ago. But before legislators could even book their travel back to the capitol, Gov. Ed Rendell is digging into his “best of” folder of tax hike proposals and dusting off an oldie from 2007 – an oil company profits tax (OCPT).
As a result of the federal government’s repeated rejection of the plan to toll the Pennsylvania Turnpike, the state is facing a transportation funding shortfall in excess of $400 million annually. To rectify this, Rendell this week called for an 8% tax on oil company profits, which his administration estimates would generate nearly $600 million per year. When Rendell first offered this in early 2007 he sought a 6.17% tax on oil company profits to fund inefficient and corrupt mass transit systems in the Commonwealth. The Pennsylvania General Assembly rightly rejected this misguided and unprecedented new tax then and should once again.
While an OCPT would naturally lead to higher prices at the pump for Pennsylvanians, Rendell claims the new tax would be structured in such a way as to prevent pass through of the heightened costs to consumers. A couple problems with this:
1) It’s illegal. Such a pass-through prohibition provision would almost certainly be found by the courts to be in violation of the Interstate Commerce Clause, which prevents states from imposing taxes which discriminate against interstate commerce, which is what a state OCPT in conjunction with an anti-pass-through provision would yield in the form of higher gas prices outside of Pennsylvania and increased costs for distributors, natural gas producers, and other employers operating in other states.
2) An OCPT would lead to higher heating oil prices just in time for winter. Rendell loves to deride “Big Oil” but the fact is that an OCPT would hit small, mom and pop oil and gas companies throughout the Commonwealth that produce heating oil for Pennsylvania households. Pennsylvania Transportation Secretary Allen Biehler confirmed this when the OCPT was first proposed in 2007.
3) Rendell characterizes oil company profits in astronomical terms and paints pictures of oil company execs swimming around in Scrooge McDuckian pools of money. However, when one looks at the numbers, it becomes clear that oil company profits are par for the course compared to other manufacturing industries in the U.S. In fact, American oil company profit margins, which average at 7.3 cents on every dollar of sales, are smaller than that of all U.S. manufacturing, which yields average profits of 7.8 cents on the dollar. A number of other industries, such as apparel and electrical equipment, have greater profit margins than oil and natural gas, yet Rendell does not bully and go after them with discriminatory taxes.
4) Rendell’s rhetoric about “Big Oil” makes clear that he doesn’t know what he’s talking about when it comes to who owns oil and natural gas companies. In fact, less than 2% of oil and natural gas industry shares are owned by corporate management. The remainder is owned by tens of millions of ordinary, yes middle class, Americans through their retirement investments in 401Ks, IRAs, pensions, and other investment vehicles. Speaking of pensions; 27% of oil company stocks are owned by pension funds. Given Pennsylvania’s pension crisis, Rendell would be well-advised to avoid any tax, such as an OCPT, that would be detrimental to public pension investments.
5) Oil company profit taxes don’t work. We’ve seen this movie before. The result of the “windfall” profit tax on oil companies that Jimmy Carter signed into law in 1980 was a 3% to 6% reduction in domestic production, according to the Congressional Research Service, necessitating an increase in imported energy supplies. Furthermore, that foolish tax fell well short of revenue projections, yielding only 25% of what was forecast.
These are just a few of the reasons why an oil company profits tax would be horrible policy and have adverse consequences for Pennsylvanians and the economy. This is why no state has ever implemented such an ill-advised and illegal tax. As such, Americans for Tax Reform will be urging Pennsylvania lawmakers to reject this proposal, as they have with so many of the other policies offered by Gov. Rendell’s economically illiterate administration during the past eight years.