Mr. CRAIG. Mr. President, I ask unanimous consent that my statement be inserted in the record prior to the final vote on passage of S. 2020, the Tax Reconciliation bill.
Mr. President, in light of Hurricanes Katrina and Rita and the mounting $319 billion deficit, Americans have increasingly called on Congress to account for its spending. The reconciliation process is designed to answer these calls for fiscal responsibility by forcing lawmakers to look deeply and honestly into the federal budget and make necessary spending cuts and provide deserved tax relief.
The Tax Reconciliation bill, currently being considered by the Senate, does many worthwhile things to this end - such as extending essential tax provisions set to expire this year like increased exemption levels for the AMT - and providing incentives to encourage charitable giving. The good effects of these provisions, however, are undercut by a fundamental inconsistency in the larger bill - namely, the bill that claims to provide tax relief actually raises taxes. Demanding more taxpayer dollars, in an effort to control federal congressional spending, is not the answer.
Section 561 of the bill, the "LIFO" provision, not only imposes an additional $4.923 billion tax but does so selectively on the energy industry alone. The "LIFO" provision artificially raises taxable income solely for a subset of energy businesses, requiring them to report higher profits than those mandated under prevailing accounting rules for the sole purpose of imposing a discriminatory tax on these businesses. Section 561 calls this "revaluation of LIFO inventories," but let us call this provision what it really is - a windfall profits tax.
Proponents of a windfall profits tax on the energy industry justify the tax on two grounds: that 1) energy industry companies currently pay too little in taxes compared to profits, and 2) the tax is effective.
As to the first, over the past 25 years, oil companies directly paid or remitted more than $2.2 trillion in taxes, after adjusting for inflation, to federal and state governments - including excise taxes, royalty payments and state and federal corporate income taxes. That amounts to more than three times what they earned in profits during the same period, according to the latest numbers from the Bureau of Economic Analysis and U.S. Department of Energy. And these figures do not include local property taxes, state sales and severance taxes, and on-shore royalty payments.
In addition, far from being excessive, oil-industry profits have historically been below the national average. The most recent statistics available show that this continues to be the case. In the second quarter of 2005, the oil industry earned 7.7 cents for every dollar of sales, where the average profit for all of U.S. industry n the second quarter was 7.9 cents for every dollar of sales. The rate of return on oil sales for the third quarter of 2005 is slightly higher at 8.1 cents for every dollar of sale, still very near the average across all industries.
Even more illustrative, 13 U.S. industries earned higher profits in the second quarter than the oil and natural gas industry, including banking (19.6 cents), software and services (17 cents), consumer services (10.9 cents), and real estate (8.9 cents). The facts speak for themselves.
Proponents of the windfall profit tax also say that the tax is effective. In 1990, however, the Congressional Research Service (CRS) analyzed the effects of the Windfall Profits Tax which was enacted in 1980 and repealed in 1988. CRS found that the tax reduced domestic oil production from between 3 and 6 percent and increased American dependence on foreign oil sources by 8 to 16 percent.
Energy markets are cyclical and the industry must manage its business in the face of significant price fluctuations. The industry has to ride out periods of low prices in anticipation of recovering during the periods of high prices. When oil prices are low, as they were throughout the 1990s, energy industry profits are insufficient to induce investment. Oil supplies are tight today for this reason. When prices rise, however, the industry is induced to invest in new infrastructure and production in hopes of capturing the benefits of higher prices. Eventually, this leads to lower prices again.
Reinvestment is critical. The Congressional Budget Office estimates capital losses from Hurricane Katrina and Rita in the energy-producing industries will range from $18 billion to $31 billion. Imposing a tax on profits, however, reduces essential investment in energy production. If taxing profits prevents the energy industry from benefiting during period of high prices, there will be little incentive to invest in domestic productions, thereby increasing the nation's dependence on foreign oil.
The goal of federal energy policy should not be to hurt - or help - the major oil companies. The goal should be to help American consumers. Taxing capital for investment does not grow jobs, does not grow the economy - only fails American consumers.
The Tax Reconciliation bill is problematic not only for its inclusion of the windfall profit tax but also for its omission of a critical provision - the extension of the 15 percent reduced tax rate for dividends and capital gains. While critics argue that the reduced tax rates of dividends and capital gains are tax cuts for the "rich" and that the costs are too high, the lower rates have been remarkably successful. Some of its successes include: significantly boosting capital investment, contributing to the economic efficiency of the corporate sector, and dramatically increasing dividend distributions - benefiting all Americans owning dividend-paying stocks, a significant number of whom are far from wealthy.
Specifically, in the year following enactment of the dividend-tax cut, 113 publicly traded corporations initiated dividend payments for the first time, compared to an average of 22 companies in prior years. Further, through July 29, 2005, the 500 U.S. companies making up the Standard & Poor's index alone have increased their dividend payments 626 times, resulting in a 21 percent increase in average quarterly dividends. If these successes are to continue - and reach their full potential - reduced tax rates for dividends and capital gains must be included in any comprehensive tax relief bill.
And continued tax relief is what this country needs to both generate more economic growth and encourage individuals and corporations to save and invest. I am prepared to vote for a tax relief package - I cannot think of a time in the past when I have not - however, it must be effective, and it must actually provide relief. The Tax Reconciliation bill before the Senate falls short of this. I sincerely hope the conference report on this bill comes back better and stronger - eliminating industry-specific tax increases antithetical to the bill's purpose while providing for sound relief provisions like the reduction in dividend and capital gains tax rates - so that we can satisfactorily answer the American taxpayers' call for a policy of fiscal responsibility.
I yield the floor.