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Analysis-Biden’s threatened windfall oil tax unlikely to pass U.S. Congress

Analysis-Biden's threatened windfall oil tax unlikely to pass U.S. Congress
© Reuters. FILE PHOTO – U.S. President Joe Biden speaks about protecting Social Security, Medicare, and lowering prescription drug costs, during a visit to OB Johnson Park and Community Center, in Hallandale Beach, Florida, U.S. November 1, 2022. REUTERS/Kevin Lamar

 

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By Timothy Gardner and Andrea Shalal

WASHINGTON(Reuters) – President Joe Biden’s threat to impose a windfall profits tax on oil companies is unlikely to pass in the U.S. Congress, even if Democrats defy forecasts and manage to maintain their razor-thin majority in midterm elections on Nov. 8.

Congress passed big, retroactive tax breaks for Big Oil when former President Donald Trump was in office, as fuel demand dropped during COVID lockdowns. After oil prices soared following Russia’s invasion of Ukraine, European governments already have imposed windfall taxes on their oil industries.

But most U.S. lawmakers show little appetite to reverse that trend after oil companies like Exxon Mobil Corp (NYSE:XOM) and Chevron Corp (NYSE:CVX)

Biden on Monday accused oil and gas companies of “war-profiteering” because shareholders are reaping the record profits boosted by Russia’s invasion of Ukraine. He said companies should instead lower fuel costs for Americans or invest some of the profits in boosting domestic production.

“If they don’t, they’re going to pay a higher tax on their excess profits, and face other restrictions,” Biden said, but tax and energy experts said he will have a hard time convincing Congress, which sets U.S. tax policy.

Senator Sheldon Whitehouse and Representative Ro Khanna, both Democrats, are among legislators who have already introduced bills to tax excess oil company profits. But not all sitting Democrats support the effort, and the Senate would likely have to pick up Democratic seats next week even to get the simple majority needed to push a windfall tax through budget reconciliation.

Democratic Senators Kyrsten Sinema from Arizona and Joe Manchin from West Virginia would likely oppose a windfall profits tax, dimming its prospects, congressional sources and research groups said. The senators’ offices did not immediately respond to requests for comment.

State and local governments could take action regardless of what Congress does, says ClearView Energy Partners, a DC research firm.

“High prices tend to make governments grabby, and a recession could strain state and local government finances,” ClearView said.

It said even U.S. oil producing states, known for low taxes and loose regulations, “might begin to eye industry profits – potentially leading to a rescission or modification of existing incentives, if not new levies.”

Administration officials conceded privately that it may be difficult to enact a federal windfall profits tax, and said no deadline has been set for a next step. Other options include a possible export ban on oil products, they said.

‘NOT NECESSARILY CRAZY’

Asking companies to pay more in taxes to fund government services from education to roads has been a key plank of Biden’s economic platform. Yet his windfall tax comments were quickly dismissed by industry and business groups and even by former Democratic Treasury Secretary Larry Summers, who suggested such moves could ultimately raise prices by discouraging investment and oil production.

“Bottom line, this is all politics and really, really bad economics,” said Scott Hodge, president emeritus of the pro-business Tax Foundation. He said a windfall tax enacted under former President Jimmy Carter in 1980 on the industry had the opposite effect, lowering domestic production.

Big U.S. companies pay less than their overseas competitors, Reuters research shows, and contribute much less to the federal budget than they did in the United States in the 1940s and 1950s.

The 2021 federal tax rate for Exxon was 2.8% and Chevron 1.8%, the left-leaning Center for American Progress calculated, after profits cratered and the Trump-backed COVID relief bill the CARES Act reduced past taxes owed based on losses during and before the pandemic.

Exxon declined to comment and Chevron had no immediate comment.

British lawmakers in July approved a 25% windfall tax on oil and gas producers in the British North Sea expected to raise 5 billion pounds ($5.95 billion) in a year to help consumers with soaring energy bills. Greece, Spain, and Italy have also implemented windfall taxes.

Joseph Thornton, a U.S. political historian and tax expert, said Biden’s plans were “not necessarily crazy,” but could be difficult to execute. Excess profits taxes on companies had found traction during World War Two only because Americans were dying in the war, he said.

“That’s traditionally how this sense of moral outage has been mustered by politicians,” to tax companies during war, he said, though high gasoline prices and inflation were clearly hurting Americans.

The International Monetary Fund last month embraced well-structured permanent taxes on excess profits on fuel extraction, saying they could help raise revenue without reducing investment or increasing inflation.

Source: Investing.com

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