Independent US oil producers to challenge windfall profits tax in court

The $277 billion "windfall profits tax" on the oil industry that was passed in March will be challenged in the courts within a few weeks or months. This legal challenge will not come from the major oil companies, as might be expected.It is being mounted by the Independent Petroleum Association of America (IPAA), which represents the nation's smaller oil producers and refiners. The IPAA board of directors decided on this course of action last week at its midyear meeting here.

The decision was made despite the fact that the IPAA, which has considerable clout on Capitol Hill, managed to reduce its members' financial liability to $25 billion over the 10 year lifetime of the tax.

"Of course, there is the question of the money involved," exclaimed Harold Scoggins, IPAA general counsel, "but more important is the precedent which is being set."

What disturbs Mr. Scoggins is the fact that this is the largest tax ever levied on a single industry in US history.

"If Congress can do this, they could also decide to tax away a homeowner's profit when he sells his home: that is as much a windfall as increasing oil prices," Mr. Scoggins argues.

In Fact, the IPAA is convinced that the tax is unconstitutional. Despite its popular name of windfall profits tax, it is not directly tied to oil company profits. It was passed in the form of an excise tax -- that is, a tax on a privilege rather than on income or assets.

"We have two basic avenues of attack," Mr. Scoggins says.

The first is to argue that the tax is, in reality, not an excise tax but a direct tax.

"The legislation does not clearly state what privilege is being taxed. Is it the privilege of extracting oil from the ground? If so why is the tax based on the selling price of the oil and why is the tax charged at the time the oil is removed from a lease rather than when it is pumped from the ground?" Mr. Scoggins asks.

If they can establish that this tax is a direct, rather than an excise tax, then the constitution demands it be apportioned accordingly to population, a criterion which the windfall profit tax fails to meet, the lawyer maintains.

If the tax is sucessfully defended as an excise tax, its opponents can take a second tack. They can argue that the law fails to comply with constitutional provisions for an excise tax.

"The Constitution states that excise taxes must be fairly apportioned among the several states," Mr. Scoggins says. "The exemption of Alaskan oil from the windfall tax is clearly in violation of this provision."

The IPAA hopes to pull together a coalition of a number of affected parties to back their legal action. Besides independent oil companies, they hope to get the support of oil-land royalty holders, and consumer groups. They estimate the cost of this legal challenge at roughly $250,000 and have created a special fund to support it.

According to the industry sources, the oil majors refused to get involved.

Should such a legal challenge to the windfall profits tax prove successful, it would be a major blow to the President's domestic policy. The tax has been touted by administration sources as one of the Carter administration's "most successful domestic accomplishments."

PResident Carter had hoped to use most of the revenue generated to bankroll a quasi-government corporation that would support domestic energy development such as synthetic fuel production. But Congress divided the financial pie differently: 60 percent going to individual and corporate income tax cuts; 25 percent to offset rising energy costs among low income groups; and 15 percent toward energy and conservation programs, including mass transit.