5. Repeal of Crude Oil Windfall Profit Tax Present Law Present law imposes an excise tax (the “crude oil windfall profit tax") on the windfall profit element of the price of domestically produced crude oil when it is removed from the premises on which it was produced. Generally, the windfall profit element is the excess of the sale price over the sum of an adjusted base price plus the applicable State severance tax adjustment. The windfall profit element may not exceed 90 percent of net income attributable to a barrel of crude oil. The tax rates and recent base prices applicable to taxable crude oil are as follows: Estimate for third quarter of 1987 based on SOI Bulletin (Summer 1986). Tier-1 oil excludes North Slope oil. 2 Phases down to 20 percent in 1988 and 15 percent in 1989 and subsequent years. Independent producer stripper well oil is exempt from the tax. Additionally, crude oil from a qualified governmental or a qualified charitable interest, certain front-end oil, certain Indian oil, certain Alaskan oil and, in the case of qualified royalty owners, up to three barrels per day of royalty production, are exempt from the tax. The windfall profit tax is scheduled to phase out over a 33-month period, beginning January, 1991, or earlier if revenues from the tax exceed a specified amount. President's Budget Proposal The President's budget proposal would repeal the crude oil windfall profit tax. The proposal would be effective October 1, 1987. Arguments for the proposal Pros and Cons 1. At present price levels, the tax raises little or no revenue, yet producers must nevertheless incur the burdensome recordkeeping expenses associated with the tax. Based on the Congressional Budget Office's most recent forecast of petroleum prices, the windfall profit tax will raise little or no revenue over the next five years. 2. The windfall profit tax discourages exploration and production of domestic oil. The windfall profit tax is in effect a sales tax on domestic crude oil which cannot be passed on by the producer since the price of petroleum is set by foreign producers who are not subject to the tax. As a result of the tax, high-cost oil may not be produced, and exploration activities may be reduced. 3. The inflation-adjusted price of oil is now less than half of what it was when the Crude Oil Windfall Profit Tax Act was enacted. This change in circumstances justifies major change or repeal of the Act. Arguments against the proposal 1. The price of oil is extremely volatile and past attempts to predict future oil prices have been fraught with error. Forecasters failed to foresee the rapid rise in petroleum prices following the October 1973 war and the rapid fall in petroleum prices in 1986. The unpredictable nature of oil prices suggests that revenue estimates of the windfall profit tax should be viewed with caution. An unforeseen crisis in the Middle East could send the world market price of oil soaring: in this event, repeal of the tax could result in a substantial revenue loss to the Federal government and a substantial windfall to oil producers. 2. The windfall profit tax minimizes adverse effects on exploration and development by setting higher base prices and lower tax rates for newly discovered, incremental tertiary, heavy, and stripper well oil. 3. In April of 1979, the Carter Administration announced that it would use its discretionary authority over oil prices to phase out price controls between June 1, 1979, and September 30, 1981. Members of Congress who favored price controls did not seek legislation against decontrol in return for Administration support for a tax on a portion of the profits attributable to decontrol. The Crude Oil Windfall Profit Tax Act of 1980 is a result of this compromise. Repeal of the tax would breach the compromise reached in 1980. *Under current oil price projections, no windfall profit tax revenues would be collected under present law for this period. C. PBGC Premiums Present Law Under present law, if a defined benefit pension plan is terminated by a sponsoring employer with assets insufficient to pay benefits guaranteed by the Pension Benefit Guaranty Corporation (PBGC), then the PBGC pays the monthly benefits required by the particular plan, up to the guaranteed levels. Subject to certain dollar limits, the PBGC guarantees nonforfeitable retirement benefits other than those that become nonforfeitable on account of the termination of the plan.1 Under the Single-Employer Pension Plan Amendments Act of 1985 (SEPPA), the sponsor of a single-employer defined benefit plan may terminate the plan only in a standard termination or a distress termination. A standard termination occurs when the assets in the plan are sufficient to pay all benefit commitments. Benefit commitments generally include all benefits guaranteed by the PBGC and all benefits that would be guaranteed but for the insurance limits on the amounts or value of the benefits. In a standard termination, the plan sponsor has no further liability to the PBGC after plan termination. A distress termination occurs in certain cases of financial hardship, such as bankruptcy, the inability of the sponsor to pay its debts when due unless the plan is terminated, or if pension costs become unreasonably burdensome due to a declining workforce. In the case of a distress termination, the sponsor continues to be liable to the PBGC for the sum of (1) the total amount of all unfunded guaranteed benefits, up to 30 percent of the employer's net worth, (2) an amount equal to the excess (if any) of (a) 75 percent of the total amount of all unfunded guaranteed benefits over (b) the amount described in (1), and (3) interest on the amount due calculated from the termination date. PBGC revenues include per-participant annual premiums with respect to defined benefit pension plans, earnings on investments, and collections from sponsors of terminated plans. Single-employer plans currently pay an annual premium of $8.50 per participant (up from $2.60 prior to 1986). The PBGC has limited authority to impose a variable rate premium. Despite the 1986 increase in the premium rate and the SEPPA restrictions on the circumstances under which employers may terminate underfunded pension plans and shift pension liabilities to the PBGC, the termination of underfunded pension plans increased the PBGC's deficit from $1.3 billion as of September 30, 1985, to 1 Present law requires that all benefits become nonforfeitable when a pension plan is terminated. $3.8 billion as of September 30, 1986. Cash payments to retired workers are estimated to exceed PBGC income in 1988. President's Budget Proposal The President's budget proposal would authorize the PBGC to charge higher premiums to those employers who do not adequately fund their pension promises. The President's proposal provides that the annual premium payable by a single-employer plan would consist of two main elements. Under the proposal, one element would consist of a minimum flat per-participant charge applicable to all single-employer plans. The flat per-participant charge would be indexed annually for inflation. The other proposed element would be a variable-rate funding charge based on the excess of a funding target over the level of plan assets. The proposal provides that the total of these two premium elements would not exceed a maximum of $100 per participant for the 1988 plan year. The $100 annual limit would be indexed. The President's budget proposal provides that the funding charge rate would be reviewed at 3-year intervals and would be revised without the need for Congressional action. Under the proposal, the $100 limit on per-participant premiums would be indexed to 1.5 times the rate of wage growth. The President's budget proposal also provides that a surcharge would be imposed for missed contributions (e.g., contributions for which a funding waiver has been granted). The surcharge would be equal to a percentage of the funding charge otherwise due. The surcharge would not be taken into account in applying the annual limit on per-participant premiums ($100 for the 1988 plan year). The proposal would be effective January 1, 1988. Arguments for the proposal Pros and Cons 1. The proposed variable-rate premium is more equitable than the flat rate premium provided by present law. It would place the greatest burden on those employers whose plans present the greatest risk of potential loss to the PBGC. 2. A variable-rate premium would encourage more responsible funding of pension benefits. Employers would rather make contributions to their plans than pay premiums to the PBGC. 3. A flat-rate premium increase of the magnitude needed to fund anticipated liabilities of the PBGC could encourage the termination of well-funded plans because employers who have funded responsibly could incur a significant increase the per-participant cost of maintaining their plans without a corresponding increase in benefits. 4. A triennial review of the variable-rate element of the premium would provide advance assurance to employers that premiums will be adjusted to reflect changes in risk. Arguments against the proposal 1. A variable-rate premium structure could unduly burden financially distressed plans and employers. The premium should not be |