More on Obama's Energy Rebate / Tax Plan
My reply to devoish got kind of long, so I decided to post it as a blog entry.
“I believe we should immediately give every working family in America a $1,000 energy rebate, and we should pay for it with part of the record profits that the oil companies are making right now.” – Barack Obama
This is the crux of TMFBent’s post on Obama’s proposed rebate. Fellow Fool devoish challenged those of us who commented to read the whole speech. I’ve now read it.
Nowhere in the speech does Obama provide any details on how that additional tax on oil companies will be assessed or how many working families get the proposed checks. Devo states it’s 77 million (I didn't see that in the speech), so we’ll go with that. $1000 x 77 million = $77 billion. Last quarter, all the oil companies combined earned something like $50 billion, annualized, that would be $200 billion. So, in theory the plan could be carried out by confiscating 40% of oil company profits – but that doesn’t mean it would work.
I don’t have data for the entire industry, but consider that the biggest oil company, ExxonMobil, reported an effective tax rate 49% last quarter. Add in this additional tax proposed by Obama and that rate jumps to 70%. Does anyone really think XOM and other companies aren’t going to change their business model if faced with that big a change in taxes? Does anyone think higher taxes won’t result in higher prices for gasoline and anything based on oil?
Some possible actions oil companies might take if Obama’s tax was enacted:
- Spin off some businesses and relocate them to more tax friendly countries.
- Move the whole company offshore.
- Leave oil in the ground and wait for a friendlier administration.
- Defer marginally profitable production projects.
It may sound far fetched, but if faced with a 70% tax rate, wouldn’t it make sense for the integrated oil companies to investigate selling off their refineries and US production business and incorporating the rest of the company in Dubai, the Caymen Islands, or some tax friendly place? What happens to Obama’s grand plan if ExxonMobil’s current $10 billion per quarter of income taxes stops flowing?
I don't know how the oil companies will respond if this tax scheme is implemented, but they certainly won't sit still and give up 40% of their current after-tax profit. In nearly all possibilities, the federal government not only doesn’t get as much windfall profit tax as they projected, they lose tax revenue they’re getting now. In short, the tax scheme won’t generate as much revenue as expected because companies shift their business plan to adapt. In this case, those business adjustments will reduce US oil supplies, raise gas prices and cost jobs as at least some energy company business is abandoned or moved offshore.
Another certainty is the higher taxes will raise the price of gasoline, plastics, transportation, heating and everything else tied to oil. There’s a very good chance the inflation caused by the new tax would cost these working families more than the $1000 credit proposed by Obama.
Consider that most companies’ stock prices are valued based on the potential earnings stream. Cut that earnings stream by 40% and the stock price should fall by 40%. Now consider that energy companies make up a little over 16% of the S&P 500. A 40% drop across 16% of the S&P 500 equates to a 6.5% drop in the market. If your family has more than $15,600 in your IRA, 401K, pension plan and stock holdings you just lost that $1000 and then some. Gee, thanks Barack. And that assumes an optimistic case where the rest of the market doesn’t follow oil companies lower.
His speech is also full of gov’t control and giveaways funded by taxpayers. As president, he plans on directing “the full resources of the federal government and the full energy of the private sector…” Last time I checked the constitution, the president doesn’t have the authority to direct the “full energy of the private sector.”
He’s also proposing a $7,000 tax credit for plug-in hybrids, extending the renewable energy Production Tax Credit for five years and placing billions of the risk of bringing alt energy technologies to market on the taxpayer. Gee, who gets to pay for all that?
And, he proposes following California’s lead in managing utilities. Anyone remember why Gov. Davis was recalled?
There’s also no answer to why oil companies’ roughly 10% profit margins deserve extra taxation while companies with much higher margins deserve to escape that treatment.
Obama does have a few good points. For example, he’s now going against his party’s congressional leadership and has joined McCain in recognizing that more drilling should be part of the solution along with nuclear power and clean coal technology.
After reading the speech, I stand by my comment that the math doesn’t work. The economics are even worse. The speech is long on wonderful objectives and gov't control and woefully short on any details of how we get there.