Higher Energy Taxes or Hands off America's Cupcakes

Mark Green
Posted April 26, 2011

OK, raise your hand if you find cupcakes simply irresistible. No shame. You're not alone. Now, for an appetite-inducing surprise: Cupcakes can teach everyone something about taxes and sound economic policy.

Stephen Comstock, who manages tax and accounting policy issues for API, has a new video that accounts for each dollar of oil and natural gas companies' net income before taxes. It's especially topical with earnings reports due out this week, which no doubt will bring calls for new energy taxes.

With the help of 100 carefully arrayed cupcakes, each representing one cent of that dollar of net income, Comstock explains that 41 go to governments in income taxes. The remaining 59 are distributed to shareholders - 17 cents of each dollar to mutual funds, 17 to individual or institutional investors, 16 to pension funds, 8 to IRAs and 1 to corporate management.

"When politicians realize that their appetite for spending is endless and they talk about raising energy taxes, they want you to think they're going after the oil and natural gas companies," Comstock says. "But in fact they're going after shareholders."

Those shareholders are regular Americans, including 55 million who own mutual funds. Just 1.5 percent of industry shares are owned by corporate management.

The fact is oil and natural gas company stocks are dramatically boosting their investments' worth. A new study by the economic advisory firm Sonecon shows that while oil and natural gas stocks made up 3.1 to 5 percent of public pension holdings in a four-state research sample, they accounted for more than 11 percent of returns from 2005 to 2008. In the two largest public pension funds in each state, oil and natural gas holdings returned a minimum of nearly three times that of all other assets. (Click here for a copy of the study's interim report.)

This data is critical with some cash-crunched states looking for loopholes to cut pension benefits of current employees, as the New York Times reports. Indeed, the Pew Center on the States has a new study showing the gap between what states set aside for employee retirement benefits and what they promised workers grew to $1.26 trillion, or 26 percent, in one year. This is no time for new energy taxes that would take money from the investments of real people.

Now, if only policymakers would get the point. That would icing on the cake.