How to avoid a windfall profits tax

Last week, I wrote about the Senate response to high oil prices: there seemed to be a lot of grandstanding, and assuring the consumers that the Big Bad Oil Companies would be paying. It very well may come to nothing, but one senatorial reaction was that of Byron Dorgan (D-ND), who hopes to propose a windfall profits tax on the oil companies that will kick in whenever gas rises above $40/barrel. (According to this article, he may be introducing that legislation today.) The Houston Chronicle has an updated article on various Senate responses to high oil prices.

Well, it seems that France is in a very similar—and perhaps more advanced—situation.

MSN Money reports that French finance minister Thierry Breton has proposed a windfall tax on oil profits and that Total, France's largest oil company, is taking his pronouncement very seriously (especially because Breton has said that this tax could close up France's deficit).
So how has Total fought back? By spending more on oil exploration, drilling and refining. The company will boost capital spending by $1 billion next year, according to Total CEO Thierry Desmarest. See, the company is saying, we're plowing those profits back into finding and refining more oil. Tax those profits and there will be less oil in the future.

It turns out that under Dorgan's proposed tax, which would tax 50% of the oil companies' profits when oil is above $40/barrel, companies would be exempt from the tax if that money was invested to build new oil exploration or refining infrastructure. Of course, Motley Fool probably rightly predicts that this legislation is DOA.

Still, we've debated plenty of ideas here that aren't likely to see the light of day (like a gasoline tax). Are there any merits to a windfall profits tax with an exploration exemption clause? Are the French government and oil companies really likely to take the idea more seriously than we will?

Before assessing this, make sure you read J's response to our previous post on exploration.

I leave you with a thought-provoking (and somewhat long) piece by the Center for American Progress which does advocate a windfall profits tax, among many other ideas.  

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The french arrangement would force Total into exploration to offset their tax mention about whether the infrastructure is needed or if the exploration is successful or not. Seems like another dumb government move.

But my simple...honestly, truly simple and easy-to-answer question is this: Who makes aditional monies under a windfall profits tax?

Why, that would be the same group IMPOSING the tax, wouldn't it? A group that has no control over exploration or oil prices? A group eager to get it's hands on any windfall? A group who routinely imposes taxes on any and everything, even on the dead?

I think everybody has seen how well government conducts business - Katrina should be a lesson for everyone. I personally don't want to give them even more money to waste.....

Recycling an econbrowser comment slightly, I think it is important to understand the complex public-private interaction in transportation and fuels.

One of my peeves is that out there in the world I hear the current gasoline price system described as a free market. I know it's not, but I don't know how to describe how free it is:

Government builds roads (and regulates their use).

Private (or semi-nationalized?) companies build cars.

Private (or semi-nationalized!) companies provide oil.

... it is a munge.

I could certainly see a that "a windfall profits tax with an exploration exemption clause" would fit right into that munge.

munge?? Qu'est-ce que c'est?
It's a programmer's word.  I actually looked it up to make sure it was out there before I posted ;-).  I think of it as two things pushed together in a messy fashion, but the dictionary I found lists it slightly differently:

"According to The New Hacker's Dictionary, munge (pronounced MUHNJ) is (1) a verb, used in a derogatory sense, meaning to imperfectly transform information, or (2) a noun meaning a comprehensive rewrite of a routine, data structure, or the whole program.

The editor of The New Hacker's Dictionary relates munge to mung, a verb meaning to make large-scale changes to a file or to destroy something, accidentally or maliciously. Mung was reported to be an acronym for 'Mash until no good.'",,sid9_gci214416,00.html

I fugured "imperfectly transform" worked for transportation politics ;-)

My father always told me, "Corporations don't pay taxes - they pass them along to the customer."
Exemptions from the windfall tax for more exploration??  No, that doesn't make sense to me.

The only way it would make sense is if the money were used for a crash program in demand reduction.  Otherwise the money would just get sucked up and come out god knows where.  I suppose they could use it to reduce the deficit, but knowing the current crew in charge, they would just pass another round of tax cuts.

If you did specify that the money collected must go towards alternative  energy sources, you would have so many pigs lining up at the trough that you would lose count in no time at all.  More handouts for the nuclear industry.  More for tar sands, or oil shale.  Any energy sources we end up developing need to be ones that can stand on their own two feet.

If we take the alternate approach of no windfall tax (which is the likely outcome), then effectively the oil companies are left to do with it what they wish.  Demand reduction isn't going to be a priority for them.

Neither one of the options is great, but this isn't exactly a great situation we find ourselves in today anyhow.

As others noted, asking oil companies to waste money to avoid paying it in taxes will accomplish that very effectively.

It's likely that additional spending on oil exploration will not yield significant results; the sector has every penny it can use.  The only appropriate responses at this time are:

  1. Demand reduction,
  2. Conversion, and
  3. Alternatives.

More efficient vehicles, partially-electric vehicles and novel sources of energy (e.g. hydrogen from algae, home cogenerators, etc.) appear to be much better investments than more drilling rigs.
Invest in new oil wells that may not bring any new btus to the market is stupid. The cost of drilling a three mile deep well is about the same as a multi-megawatt wind turbine. The wind turbine will put out btus for decades to come. The oil well a few years, months, weeks, maybe none at all.
I agree with all the comments so far about this being a Truly Bad Idea.

If you want any company to pay its fair share, then make sure the tax code is fair, and leave industry-specific fine tuning out of the picture.

I would add, though, that there are ways that taxes can be used to acomplish good things right now.  I've mentioned before on TOD that I would like to see a gasoline tax announced that would be something like: Add 25 cents/gallon now, with an additional 10 to 20 cents every three months for the next two to three years, and funnel that money into alternative energy R&D and construction grants.

The goal would be not just to fund the right kind of projects, but do it via a tax scheme that would give consumers (and therefore planners) a degree of certainty about future prices.  This would make it vastly easier for people to justify downsizing their vehicles and making other changes that would reduce oil consumption.

Of course, no US politician would ever propose anything like this.  

Ianqui asks
"Are there any merits to a windfall profits tax with an exploration exemption clause? Are the French government and oil companies really likely to take the idea more seriously than we will?

Before assessing this, make sure you read J's response to our previous post on exploration.
Well, if you do read J's post it becomes obvious that an "exploration exemption" is equivalent to allowing the windfall profits to continue unabated anyway. Continued exploration is mostly pointless and all you've done is give the oil companies another tax break.