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Reasonable Profits Board for Oil Harms Teachers, Police Officers, Firefighters

Posted By Rory Cooper On January 30, 2012 @ 2:34 pm In Featured | Comments Disabled

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In his State of the Union address, President Obama emphasized [2], “We don’t begrudge financial success in this country. We admire it.” That may be the case if you make iPods, iPads, and iPhones, but when it is “big oil” (i.e., stockholders, pension funds, and IRAs investing in oil companies) that has a successful quarter, let the public onslaught commence.

The most recent attack has been legislatively, when Representative Dennis Kucinich (D–OH) introduced “the Gas Price Spike Act.” The provisions in the bill threaten the entrepreneurial spirit and our system of free enterprise and ignore why profits matter.

As The Hill recently reported [3], Kucinich’s bill amends the Internal Revenue Service code to create a windfall profits tax to kick in after profits exceed a “reasonable” amount:

[A] windfall tax of 50 percent would be applied when the sale of oil or gas leads to a profit of between 100 percent and 102 percent of a reasonable profit. The windfall tax would jump to 75 percent when the profit is between 102 and 105 percent of a reasonable profit, and above that, the windfall tax would be 100 percent.

Who determines what’s a reasonable profit? The Reasonable Profit Board, of course. The three-person board would be appointed by the President—with no confirmation process and no guidelines to determine what constitutes a reasonable profit. While constitutional originalist scholars dispute the power of Congress to delegate this much legislative discretion, unfortunately the courts have upheld similar delegations [4] for decades.

The most disconcerting aspect of this legislation is that it completely ignores who owns big oil [5] and who stands to benefit from its profits. Pension funds (31 percent), individual retirement accounts (18 percent), individual investors (21 percent), and asset management companies including mutual funds (21 percent) comprised more than 90 percent of oil and gas stocks in 2011. A recent study by the economic advisory firm Sonecon [6] examined pensions of public state and local employees in 17 states and found that oil and gas stocks comprised 4.6 percent of the fund assets but provided almost 16 percent of the return.

This legislation seeks to create an environment where all of a company’s incentives to innovate and reinvest will be stripped away. Companies invest so they can extract oil and gas from the ground in ways that are safer and more cost-effective. Profits reward good investments just as losses punish bad investments. Profits also allow businesses to hire more workers and increase wages. Additionally, high profits in a good year can cushion the blow in a bad year so a company won’t have to move through bankruptcy or ask for a government bailout.

So why on earth would Kucinich and his colleagues want to enact such a disastrous policy? They contend that, similar to unfounded attempts to prevent oil companies from “price gouging,” [7] the intention is to protect Americans from high gas prices. The greatest irony of the legislation is that it would discourage domestic production, thereby decreasing the amount of oil supplied to the world market, which would lead to higher gas prices.

There are plenty of solutions that could actually lower the price of oil, such as opening up more areas for drilling and creating a timely permitting and environmental review process.

The mere suggestion of a Reasonable Profits Board means only one thing: We’ve officially reached Atlas Shrugged territory.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/01/30/reasonable-profits-board-for-oil-harms-teachers-police-officers-firefighters/

URLs in this post:

[1] Image: http://blog.heritage.org/wp-content/uploads/police-officers.jpg

[2] emphasized: http://www.whitehouse.gov/the-press-office/2012/01/24/remarks-president-state-union-address

[3] As The Hill recently reported: http://thehill.com/blogs/floor-action/house/205085-dems-propose-reasonable-profits-board-to-regulate-oil-company-profits

[4] the courts have upheld similar delegations: http://www.casebriefs.com/blog/law/administrative-law/administrative-law-keyed-to-strauss/agencies-and-the-structural-constitution/whitman-v-american-trucking-associations-inc/

[5] who owns big oil: http://whoownsbigoil.org/

[6] recent study by the economic advisory firm Sonecon: http://www.sonecon.com/studies.php

[7] to prevent oil companies from “price gouging,”: http://www.heritage.org/research/commentary/2011/03/obama-policies-drive-up-gas-prices

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