Senators Propose Oil Speculation Tax

by Leroy Baker, Tax-News.com, New York

04 August 2008

In an effort to reduce excessive speculative trading in oil and other commodities, US Senators Ron Wyden (D-Ore.) and Chuck Grassley (R-Iowa), have proposed legislation that would end lucrative tax breaks that speculators enjoy by taxing all the profits they earn on the oil commodities market at the same rate as ordinary income.

In announcing the circulation of the staff discussion draft of the legislative proposals on Thursday, Wyden and Grassley said that since 2000, commodities markets have been flooded with hundreds of billions in speculative investments in oil and gas commodities which many experts believe have helped drive energy prices to record levels.

Under current tax law, commercial buyers — such as airlines, trucking companies, and independent refiners — who need to buy oil or other fuels or futures contracts in order to run their businesses pay ordinary income tax on any profits from such trading. By contrast, for-profit speculators pay lower capital gains rates on their profits and tax-exempt investors — such as pension funds and university endowments — pay no taxes on these investments.

Under the Wyden-Grassley staff’s draft proposal, everyone directly purchasing oil and natural gas (or related products like diesel fuel), or indirectly through futures contracts, commodity index funds or other investment strategies, would be taxed as if they were commercial commodity traders.

“Essentially the current system is giving speculators tax incentives to bid up the prices of oil,” said Wyden, a member of the Senate Finance and Energy Committees. “We just don’t think the tax code should favor one set of buyers and sellers over another. That is how markets get distorted.”

“Tax policy should be fair," added Grassley, the ranking member of the Senate Finance Committee. "The public comments on this draft proposal will help us determine fair tax treatment of oil and gas speculators.”

According to the lawmakers, in 2000, speculative trading in the oil futures markets accounted for 37% of crude oil trading on the New York Mercantile Exchange; today that number has grown to more than 70% of trading. More oil contracts are being held by financial firms - who see oil as an investment opportunity - than the collective demand of companies that need to purchase oil and other oil products to operate, they said.

“We are not under any illusion that speculation is the only cause of high oil prices,” added Wyden. “But looking at the enormous fluctuations in the oil market from one week to the next, it’s pretty clear that the number of drivers in China didn’t double overnight. If we want to do something about the skyrocketing price of oil, we have to look at speculation.”

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