The Worst of the Gas Tax Debate
Posted on May 3rd, 2008 in Tax
We present to you the worst of the gas tax and windfall profits tax debate:
(1) “Barack Obama doesn’t understand the effect of high gas prices on the American economy,” McCain spokesman Tucker Bounds said in a statement. “Sen. Obama voted for a gas tax reduction before he opposed it, he has no plan for relief from record-high gas prices for Americans this summer and he’s the empty-tank candidate in this race.
On the issue of the gas tax holiday, Barack Obama is correct. On the issue of the windfall profits tax, Obama is just pandering. But Senator McCain’s proposal won’t bring relief from record-high gas prices either.
(2) “There are times a president will take a position that a group of quote-unquote experts will agree with and there are times when a president will take a position that a group of quote-unquote experts won’t agree with it,” campaign spokesman Howard Wolfson told reporters today, “Sen. Clinton believes this is the right policy.”
These "quote-unquote" experts are essentially unanimous in their opposition, and it doesn’t matter what side of the aisle they are on, or whether they favor a larger or smaller role for government.
(3) Clinton also noted that while Democratic rival Sen. Barack Obama, D-Ill., opposes the idea, it has been embraced by presumptive Republican rival Sen. John McCain, R-Ariz.. The Indianapolis Star said Clinton chided McCain for not backing her idea of a windfall profits tax on the oil industry to make up the lost tax revenue. "I sort of feel like Goldilocks," Clinton said. "Not too much, not too little. Just right."
Actually, the nursery rhyme three blind mice would be more appropriate for the three candidates’ positions on this issue.
(4) Obama: "We’ve got to go after the oil companies and look at their price-gouging. We’ve got to go after windfall profits … then we’ve got to use less oil, and that means raising fuel efficiency standards for cars."
"Price gouging" is already illegal. With regards to "go after the oil companies…," it’s just pure rhetoric that plays well with an angry audience. A windfall profits taxes would be paid by the individuals who own the oil companies either directly as individual shareholders or indirectly through pension funds. The CEO’s of these corporations aren’t exactly the only ones that would be harmed by such a tax. Furthermore, a windfall profits tax is a bad way to reduce one type of investment in future energy.
ATR suggests providing a year-end tax deduction to consumers which could be filed using the income tax system. At the end of each fiscal year, energy receipts from the preceding year would be tabulated and that amount deducted on their income tax form. Just as individuals can deduct their home mortgage or sales tax from their federal income tax bill, this same concept would be applicable to the consumption of fuel.
Such a proposal is worse than the gas tax holiday. It would create more complexity in the federal income tax, especially given that it would require energy receipts. Second, it would encourage more energy consumption, and to a large extent merely be capitalized into the price of energy, thereby saving consumers as a whole very little. And finally, the subsidy would vary based upon one’s marginal tax rate, and thereby via the price effect would likely have the result of making energy more expensive for the poor, while slightly subsidizing energy for the rich (those in higher marginal tax rates).
(6) Hillary Clinton speaking about a windfall profits tax: “We will pay for it by imposing a windfall profits tax on the big oil companies. They sure can afford it."
Similar to Obama. She doesn’t tell the whole truth by telling us which individuals will pay for it, and why those individuals should. See more here.
(7) Clinton also said she will make sure that the tax suspension is passed on to motorists by ordering the Federal Trade Commission to aggressively oversee service stations. Democratic rival Barack Obama has raised that concern in so far not supporting the gas tax suspension.
Trying to legally enforce economic incidence = price controls.
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Yesterday, Democratic presidential candidate Hillary Clinton made the following statement in support of her windfall profits tax on oil companies to finance a temporary gas tax holiday:
“We will pay for it by imposing a windfall profits tax on the big oil companies. They sure can afford it."
They can afford it? What does that even mean? A windfall profits tax will be borne almost entirely by the shareholders of the oil companies. Companies really have no "ability to pay" as their taxes are borne by individuals, which is where the true "ability to pay" lies.
Clinton fails to understand that the current value of the oil stocks that shareholders are holding represents expectations about future profits (even if those profits are from economic rents due to some barriers to entry, etc.) and those accrued profits that have yet to be distributed (either via stock buyback or dividend payments). However, the shareholders of Exxon-Mobile, Shell, BP, etc. change everyday. So if I go buy a share of Exxon today at its high price expecting higher future payments, but then Clinton’s windfall profits tax kicks in, I would be the one to lose, an individual who has not benefited a dime from the higher profits that Exxon has reaped.
On the other hand, many stockholders of Exxon are stable, mostly pension funds and those who merely hold onto the stock for a long period of time. If one truly feels that the current profits Exxon (and others) have made are excessive and unfair, then really the only fair tax would be to somehow tax those shareholders past and present that have truly benefited from those "excess" profits. And that will not necessarily be the same person who holds the stock at the time of the profits being earned due to expectations being factored into the stock price. In lay men’s terms, you would ideally be taxing those who bought low and sold high (or currently hold the stock). Otherwise, there is no justification from a "they sure can afford it" argument for imposing a windfall profits tax because the party that bore the windfall profits tax may not necessarily be the same party that reaped the gains from the profits. It would actually be more justifiable under the "they can afford it" criterion to merely raise capital gains taxes and dividends taxes at the individual level, although doing so would some adverse economic consequences (no free lunch).
Overall, Clinton fails, like most politicians on both sides of the aisle who know little about tax incidence, to realize that corporations’ tax burdens (and profits) are borne by individuals.
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Today’s Politico had a story detailing how the National Association of Home Builders yields excessive influence in the tax policymaking process, seeking to have resources flow its way at the expense of economic efficiency.
The nation’s home builders are switching lobbying tacks as the industry seeks relief from the mounting housing crisis.
The National Association of Home Builders announced Wednesday that its new top priority is to secure passage of a tax credit for first-time homebuyers, worth up to $7,500, that’s part of a housing tax package approved by the House Ways and Means Committee.
After intense analysis and internal polling, the association concluded that the tax credit was the most stimulative policy option on the table, said Jerry Howard, the group’s executive vice president and chief executive officer.
“Our members overwhelmingly believe that this tax credit concept is just the ticket to get them out of the doldrums,” he said. “They’ve given us the marching orders to shift our focus.”
The decision comes after months of pursuing another policy option to help the industry through the economic slowdown — a tax provision to allow home builders and other hard-hit industries apply current losses to past tax years and claim refunds.
In early April, the Senate passed its own housing bill that included just such a “carry back” provision. It would cost $6.1 billion over 10 years.
Let’s see. Members of Congress can listen to the National Association of Home Builders who is set to reap windfalls from the provision and says more tax credits for housing is good, or they can listen to every tax research organization in Washington (left and right) who has little financial stake on the issue and says more tax credits for housing is bad? Guess who they will choose?
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Here’s the logic of our elected representatives in Congress when it comes to taxing profits:
Oil companies are benefiting from the higher price of an asset (oil), some of which is driven by speculation. So the proper policy prescription is to impose a special windfall profits tax on them during that boom period.
Home builders benefited from the high price of an asset (housing), some of which was driven by speculation. So the proper policy prescription is to allow them to reduce their tax bills they paid during that boom period via a special loss carryback provision.
Can you tell it’s an election year?
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Amazon has filed suit in New York state court seeking to invalidate the recently passed "Amazon tax", which requires any out-of-state online retailer collect sales tax on purchases if the business does at least $10,000 worth of business with in-state affiliates, even if it has no property or employees in the state.
In its lawsuit, Amazon argues the law violates the Commerce Clause, Due Process Clause, and Equal Protection Clause of the U.S. Constitution. They have a good case, as we previously discussed:
New York’s move is just the latest in a string of state efforts to abandon the physical presence rule of taxing out-of-state businesses. In 1992, the U.S. Supreme Court reaffirmed the rule in the Quill v. North Dakota case, holding that a state could not impose sales tax collection obligations on a company, unless the company has either property or employees in the state. Amazon has neither in New York.
Far from creating a level playing field, New York’s new law and other efforts to abandon the physical presence rule (California has a pending bill, A.B. 1840) actually move away from a level playing field. If every state did what New York did, online retailers would have to keep track of the different rates and bases of the 7,400+ sales taxing jurisdictions in the United States and all the income tax systems. We here at the Tax Foundation have a lot of researchers and subscriptions trying to do that, and it’d be quite burdensome for small online retailers to tackle that task. Meanwhile, brick-and-mortar retailers need only keep track of one sales tax rate and base.
Many states are hoping that the Streamlined Sales Tax Project, by simplifying state sales taxes, will paper over this fundamental inequity by making compliance easy. (Hard to believe since their stretch goal is to limit the 7,400+ sales tax jurisdictions by nine-digit zip codes, of which there are 38,547,080.)
Amazon’s filing papers elaborate on how it impacts them:
The new law is based on a novel definition of what constitutes a presence in the state: It includes any Web site based in the state that earns a referral fee for sending customers to an online retailer. Amazon has hundreds of thousands of affiliates–from big publishers to tiny blogs–that feature links to its products. It says thousands of those have given an address in New York State, although it does not verify the addresses. The state law says that if even one of those affiliates is in New York, Amazon must collect sales tax on everything sold in the state, even if it is not sold through the affiliate.
Yours truly made a push for neutral tax systems that don’t discriminate against online retailers in a comprehensive Internet News article by Kenneth Corbin:
"Brick-and-mortar retailers will have to keep track of just one tax law at a time, while online retailers will have to keep up with 7,400," he said. "A neutral tax system would have all retailers collect tax on one standard or the other."
We’ll continue to monitor this case as it develops. More on the physical presence rule here, here, and here.
