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Congress Takes Aim at 'Big Oil'

By Steve Forbes

In what's become an annual rite of spring, politicians in Washington are posturing before the cameras about how they are going to deal with rising gas prices. Their solutions always start with how they are going to take on big, bad oil companies and end with more taxes, regulation, price controls and mandates. While the rhetorical attacks may sound good on TV or in their press releases, these policies would only harm the very consumers they claim to be concerned about.

First up is to outlaw "price gouging," which they allege is behind the run up in prices - never mind the rise in the price of crude oil on the world market and other market forces. Ignoring the fundamental laws of economics, as they often do, Congress wants to criminalize the law of supply and demand and keep the specter of criminal penalties hanging over the industry. Every investigation by the FTC and by state and local officials has concluded that there is no evidence of gouging or manipulation.

Even the New York Times in a recent article asked if gouging was a "phantom menace." In the article, reporter Edmund Andrews pointed out "if the oil industry is so powerful, why did it let gasoline prices fall through the floor throughout the 1980s and part of the 1990s? For that matter, why did it let gasoline prices fall sharply after they spiked in 2005 and 2006?" This political posturing by Congress will only result in de facto price controls, and anyone who lived through the 1970's will tell you how that worked - it only led to shortages and long gas lines

More worrisome are the various tax proposals coming out of the economic geniuses in Washington. Every increase in gas prices or positive profit announcements from energy companies is met with a call for more taxes on the industry despite the fact that oil companies already pay more in taxes than most other corporations. According to the Tax Foundation, the "average effective tax rate" on oil companies is nearly 39%, compared to 33% for other industries. The reality is that increased taxes and regulation creates an environment for less investment, which means less production and higher prices.

The crown jewel of their tax proposals is always the windfall profits tax. Year after year, members of Congress reintroduce the legislation to tax the "excess" profits of oil companies. Never mind that the last time we enacted the windfall profits tax in the early 1980's it led to decreased domestic production and increased our reliance on foreign oil, according to the Congressional Research Service.

And to make matters worse, earlier this year the House passed legislation (H.R. 6) that would increase taxes on the energy industry to create a government fund to support alternative energy. Many referred to the bill as a national version of Proposition 87 in California, which was resoundingly defeated in one of the greenest states in the country. Voters understood that it makes no sense to raise taxes on the domestic oil industry to create a pot of money for politicians to play with. The House passed the disastrous bill anyway, putting American companies at a disadvantage to foreign oil companies, many of whom are controlled by their governments.

This week, the Senate Finance Committee passed a similar bill that raises taxes on oil and gas companies by $21 billion to throw a host of subsidies at an assortment of "alternative" energies. Hopefully, the full Senate is wise enough to stop this destructive approach in the coming days.

Politicians in Washington seem to have a host of other taxes they are ready to throw in the mix as well. This includes the idea of taxing the oil industry by changing the long standing accounting method used by all industries to track inventories - known as last in first out (LIFO). The legislation, which failed in 2006, was called a "backdoor windfall profits tax" because it would use an accounting gimmick to confiscate money by denying select companies the ability to use the same accounting method every other industry uses. Vladimir Putin and Hugo Chavez must be taking notes. Another tax in the mix is denying oil companies the right to take advantage of the foreign tax credit, which all industries enjoy. Once again, this would put American oil companies at a disadvantage to foreign oil companies.

Of course, the same politicians wringing their hands over gas prices and advocating punitive action against "big oil" are the same ones who oppose every attempt to increase supply and production. These politicians have voted down domestic drilling legislation, which could unlock tens of billions of barrels of oil and the equivalent of natural gas. They have blocked attempts to change regulations preventing the construction of new refineries. With uncertainty in many oil producing nations, tight supply and refineries operating at full capacity, these are the types of policies that could make a difference at the pump, helping consumers and decreasing our reliance on foreign oil.

The rise in prices at the pump causes real pain for consumers and has the potential to negatively impact our economy. The last things we need are posturing politicians, price controls and punitive tax hikes - all of which harm consumers and undermine energy security.

Steve Forbes is editor-in-chief of Forbes Magazine.

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