Tax proposed to “equalize” oil and gas commodity trading income

Last week, Irving, Texas-based Exxon Mobil, the world’s largest oil company, announced a record quarterly earnings of  $11.7 billion.

Earlier, Royal Dutch Shell, based in the Netherlands, reported a 33 percent increase in profit. London-based BP announced a 28 percent profit increase.

And ExxonMobil’s in-state neighbor, Houston-based ConocoPhillips, reported a 13 percent increase in net income during a quarter in which oil prices rose from about $100 to $140 a barrel.

So it’s no surprise that politicians in Washington, D.C., most of whom are chauffeured around the city (or at least they were when I was there), are huffing and puffing about how well capitalism works.

OK, that’s not how they’re putting it, but that’s essentially the case. They want the oil companies, with their record earnings, to share some of the pain you and I are feeling at the pump.

Now I’m no fan of big oil, even though I’m a Texan born and bred. But isn’t getting the highest price that the market will bear the goal? If these guys can figure out how to make the system work, thanks in large part to Americans’ love of driving everywhere, then so be it.

Energy vs. oil strategies: It would be great if instead of threatening to beat oil companies about the head with a windfall profits tax stick, legislators tried to encourage them to become not just oil companies, but energy companies. I’m not alone in this wish. Americans want their next president to invest in new energy sources, according to the latest USA TODAY/Gallup Poll.

Sure, I’ve seen those ExxonMobil television commercials that tout some of the moves the company is making that direction. But all the oil companies need to do more of that and do it and quickly. And yes, some added tax benefits might help.

Then there’s the self-styled Gang of 10, a bipartisan group of Senators who for the last few weeks have been pushing their energy proposal that calls for more drilling, conservation and tax incentives for alternative car fuels. So far their all-over-the-board efforts aren’t getting much traction. And did I mention they want more drilling?

Most politicians, however, like to aim at the easy target to show that they’re striking a blow for you and me. So they tend to rail against oil companies.

Expanding oil-related tax targets: Now, however, a couple of Senators have expanded their oil-related tax targets.

Last week, as the oil company earnings were announced, two members of the Senate Finance Committee (SFC) floated a draft proposal to "equalize" the tax treatment of oil and gas commodity trading income.

Senators Chuck Grassley (R-Iowa), who is the ranking minority member on the SFC, and fellow committee member Ron Wyden (D-Ore.), have put together a draft that would tax profits earned by oil and gas commodity speculators as short-term capital gains, at least through 2012. Short-term rates are the same as ordinary tax rates, which could be as high as 35 percent.

"Essentially the current system is giving speculators tax incentives to bid up the prices of oil," Wyden said in the announcement of the measure. "We just don’t think the tax code should favor one set of buyers and sellers over another. That is how markets get distorted."

According to the Senators, since 2000, commodities markets have been flooded with speculative investments in oil and gas commodities, which many experts believe have helped drive energy prices to today’s record levels.

Two tax methods: Under current tax law, commercial buyers (e.g., airlines, trucking companies, and independent refiners) who need to buy oil or other fuels or futures contracts in order to run their businesses, pay ordinary income tax on any profits from such trading.

But for-profit speculators pay lower long-term capital gains rates on their profits, note the Senators in their release, and tax-exempt investors, such as pension funds and university endowments, pay no taxes on such investments.

The Wyden-Grassley draft proposal would require that everyone directly purchasing oil and natural gas (or related products like diesel fuel), or indirectly through futures contracts, commodity index funds or other investment strategies, be taxed as if they were commercial commodity traders.

"Tax policy should be fair," Grassley said in the release. "The public comments on this draft proposal will help us determine fair tax treatment of oil and gas speculators."

Of course, there are concerns that taxing gains from oil commodity
trading at short-term capital gains rates while taxing gains from other
commodities at long-term rates could distort markets. Expect that to be
a key argument by lobbyists for oil and gas traders who will work to
dismantle this measure.

Give ’em a piece of your mind: What do you think? Is the Grassley-Wyden proposal a good move? Fair? Too little? Too late? Off the wall?

The lawmakers want to know. They’re asking for input on the proposal, especially from tax professionals.

So give the draft measure a read. Below are links to the various information options.

• Draft legislation 
• Fact sheet   
• Section-by-section overview   
• Technical explanation 

Then let Grassley and Wyden know what you think at this comment page. Feel free to post your thoughts here on the ol’ blog, too.

Before I read all this stuff, though, I’m heading down the street to my local Shell station to fill up the old Cavalier. I hear that regular gas there is now going for "just" $3.79 a gallon.