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199 IRET Congressional Advisory 1 (2006)

handle is hein.taxfoundation/iretcgadv0196 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. March 2, 2006 Advisory No. 199 SENATE TAX PROVISIONS FUEL CONTROVERSY The U.S. House and Senate were unable to agree on a tax reconciliation package in 2005. Their efforts continue this year. Tax reconciliation legislation is a vehicle for extending some of the tax- relief provisions that were included on a temporary basis in the 2001, 2002, and 2003 tax acts. The House and Senate have passed significantly different bills, with some of the key dissimilarities having to do with revenue raisers.1 The Senate version of the legislation contains a number of proposed tax increases to partially offset the estimated revenue loss from the extenders; the House bill does not include the tax increases. According to Congress's Joint Committee on Taxation (JCT), the revenue raisers in the Senate's plan total $34 billion over the period 2006-2015, with $10.4 billion in 2006 alone.2 A House-Senate conference will attempt to resolve the differences. The tax increases in the Senate bill are controversial. The three that have attracted the most attention are aimed at the five largest integrated oil companies. The Senate bill does not explicitly name the five companies, but the statutory language singles them out.' They are U.S.-headquartered ExxonMobil, Chevron, and ConocoPhillips, and the U.S. subsidiaries of Royal Dutch Shell and British Petroleum. Two of the provisions would affect all five. One would hit only the U.S.-headquartered companies. The three oil-company-related provisions in the Senate bill appear to be linked to a Congressional hearing last November in which several Senators demanded to know from executives of the five companies why oil prices had shot up following hurricanes Katrina, Rita, and Wilma.4 Of course, the answer is that a drop in supply, other things equal, causes a rise in price. Because the hurricanes, especially Katrina, delivered a devastating blow to U.S. oil production and because the demand for oil is inelastic (it takes a big rise in price to reduce the quantity demanded significantly), one can predict from Economics 101 that the resulting price increase would be large. Political turmoil in the Middle East, concern about Venezuela (which accounts for a significant share of U.S. oil imports), and increased demand in countries like China and India placed further upward pressure on prices. Although the price spike following the hurricanes has been painful, it was unavoidable given the magnitude of the supply disruption, unless the United States were to resort to price controls and rationing. Price controls and rationing would have led to even worse problems, as previous experiences with such devices in this country and elsewhere have clearly shown. The Senate version of the tax reconciliation bill contains a number of other tax increases. Those assorted revenue raisers also merit a closer look. Oil-Company-Related Provisions The Senate bill includes three provisions directed against some or all of the five largest integrated oil companies. One would prevent the three U.S.-headquartered companies from claiming foreign tax credits for some of the income taxes they pay to foreign governments. A second provision would force the five companies to make a one-time inventory revision that would increase their tax bills by an estimated $4.3 billion in 2006 and 2007. A e~em km A * * gg~ 8 ~gg

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