Governor's budget inspiration? Jimmy Carter and Alaska

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HARRISBURG -- Inspiration can come from unlikely sources.

In crafting the 2007-08 state budget, Gov. Ed Rendell might have found his in former President Jimmy Carter, who imposed a windfall tax on oil companies in 1980, and Democrats from Alaska, who have been trying to levy a tax on oil companies' gross profits for three years, unsuccessfully.

A controversial "gross profits tax" on oil companies was one of the centerpieces of Mr. Rendell's budget address yesterday, and the governor devoted a healthy portion of his annual speech to the issue of ExxonMobil's record profits over the last three years.

He said it's incumbent upon oil companies to help foot the bill for Pennsylvania's aging highway system and its inefficient, under-funded public transit systems.

It would be the first such state-imposed tax in the country.

"These profits have come from one source -- the pockets of the American people," Mr. Rendell said near the end of his 55-minute speech. "It is time for the oil companies to finally pay their fair share of the transportation tax burden in Pennsylvania."

Mr. Rendell wants the Legislature to consider eliminating the state's 9.9 percent corporate net income tax as it applies to oil companies, and instead assess a 6.17 percent gross profits tax. He says the tax would raise $760 million a year, or $690 million more than the current corporate net income tax is deriving from the seven oil companies that pay it.

The low take, the governor said, is the fault of the state's income reporting system, which allows companies doing business and making money here to shift that revenue to another state, meaning it can't be taxed here -- the so-called Delaware loophole. Mr. Rendell said the state could rectify that by requiring companies to calculate and report all of their assets, allowing the state to determine "what portion of their profits come from Pennsylvania."

"Like many other big corporations, the oil companies have gotten very good at structuring their profit reporting so that our taxes don't apply," he said.

Trade groups and oil lobbyists wasted little time in denouncing the governor's plan.

"It caught us off guard. We had no calls from the administration to let us know this was being contemplated, let alone being introduced," said Rolf Hanson, lobbyist for and director of the Associated Petroleum Industries of Pennsylvania.

It's politically popular, he said, to beat up on ExxonMobil for its record $39.5 billion in profits last year, but the tax would also fall to local oil and gas producers, drillers, wholesalers, even distributors of petroleum -- Sheetz Inc. would be included in that group, he said.

Stephen Rhoads, president of Pennsylvania's Oil and Gas Association, said Mr. Rendell's plan to tax one industry differently than the rest was tantamount to "discrimination." House Minority Leader Sam Smith, R-Punxsutawney, said he'd be "very interested to see how the governor is going to enact that without it being passed on to consumers."

Mr. Hanson, as well as state Department of Transportation Secretary Allen Biehler, said the tax would be unique were it to take effect, but Pennsylvania isn't the first to think of it. In Alaska, a petroleum-rich state, Democrats have been trying to get their cross-aisle rivals to go along with a plan to tax oil company gross profits, saying such a tax is more predictable than their current system, which they say is fraught with deductions and tax credits for Big Oil.

Democrats at the federal level also have discussed an excise tax on oil profits derived from revenues that exceed $40 per barrel.

If Pennsylvania succeeds, other states could follow. Mr. Hanson said the oil tax has been a popular topic among the members of the Democratic Governors Association, and he expects other states with Democratic governors to follow Mr. Rendell's lead, if he wins his battle with skeptical Republicans and a hostile oil industry.

Gantt Walton, a spokesman with ExxonMobil, said Mr. Rendell apparently hasn't learned any lessons from the Carter administration's 1980 oil "windfall tax." After the tax was repealed under President Ronald Reagan, a federal study showed that American dependence on foreign oil increased, and oil companies had less to spend on research and development.

"It was a bad idea then, and it's a bad idea now," Mr. Walton said.

R&D money is especially vital now, Mr. Walton, said, considering that Mr. Rendell not only wants to collect more taxes from oil companies, but also want to steer Pennsylvania toward energy independence and gasoline with higher ethanol content. Both standards would require more money to be spent on domestic infrastructure and gasoline research.

Mr. Rendell thinks there's room for greater tax payments as well as research and development, given that ExxonMobil's profit margin is at 10 percent, and the oil industry average is usually at 5.9 percent (the national average is 5.2 percent, said Mr. Hanson.)

Though the oil tax was probably the most controversial of the business taxes pitched by the governor, there were others. Mr. Rendell wants Pennsylvania to join the other 49 states in taxing smokeless tobacco products, as well as cigars, and he'd do it at a rate of 36 cents per ounce of the smokeless, or roughly 3.6 cents for every cigar.

He'd also add 10 cents to the existing cigarette tax, now at $1.35 a pack.

"I think he's making a mistake," said Jim Cohen, owner of Poor Richard's Tobacco Shop in Station Square. "It gives us a little competitive edge in Pennsylvania." Cigar shoppers are bargain hunters just like everyone else, and they come to Pennsylvania for the lower price.

The tobacco tax revenue would be used to fund a variety of health initiatives.

Mr. Rendell also wants to impose a $2.25-per-ton tipping fee on waste haulers, a cost that would be largely borne by out-of-state companies that dump their trash in Pennsylvania landfills. The money would pay for the clean up hazardous brownfields, but Mr. Rendell ran into resistance in 2004, the last time he proposed a tipping fee.

As is the case with nearly every tax, this trash disposal tax, Republicans feared, would eventually get passed down to the consumer.

The various business tax increases, said budget Secretary Michael Masch, are offset by a proposed $216 million in business tax cuts for the 2007-08 budget year, which begins in July. Most of that savings comes from a continued phase-out of the capital stock and franchise tax, which has been reduced to 3.89 mills.

The business community also is pushing for a reduction in the state's corporate net income tax, currently at 9.99 percent.

Mr. Rendell said he hopes to reduce it to 7.9 percent.

Bill Toland can be reached at or 412-263-2625.


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