Source: http://canaryusa.com/the-export-taxation-clause-and-the-illegality-of-the-crude-oil-export-ban/
Timestamp: 2020-06-03 00:56:29
Document Index: 720755045

Matched Legal Cases: ['§9', '§446', '§ 6212', '§ 181', 'art 754', '§754', '§754', '§ 1801', '§ 95', '§ 1', '§101']

The Export Taxation Clause and the Illegality of the Crude Oil Export Ban - Canary, LLC
The Export Taxation Clause and the Illegality of the Crude Oil Export Ban
“Safety and certainty in oil lie in variety and variety alone.” Winston Churchill1
It was as First Lord of the Admiralty, leading up to World War I, and in the context of the British Navy’s new dependence upon imported fuel oil from Persia, that Winston Churchill declared that energy security lay in a variety of oil suppliers.
For decades, this proclamation held true. However, the paradigm of energy security has changed. Energy security today requires not just a variety of energy suppliers, but a variety of energy resources. The United States possesses both and is in a position of strategic energy security.
The United States had achieved energy security prior to 1950 (then thought of in practical terms and discussed as energy “independence”). At that time, the USA was producing more than 50 percent of the world’s oil.2,3
It wasn’t until some time after World War II that the economic boom demanded more oil than United States wells could produce. From 1950 to 1973, US oil imports grew rapidly: from zero to about 32 percent of domestic consumption.4
In 1973 came the infamous oil embargo that lasted 6 months. The embargo severed oil imports from the Middle East, causing severe fuel shortages and gas rationing. This “oil shock” precipitated a 40-year ban on the export of crude oil with an eye to preventing such a thing from happening again.5
The key piece of legislation which enabled the ban to be placed is the Energy Policy and Conservation Act (EPCA). It was signed into law by President Ford in 1975. The EPCA explicitly permitted the President “to restrict exports of coal, petroleum products, natural gas …” It also set up a mechanism via which any export of crude oil would have to be licensed by the Bureau of Industry and Security (part of the Department of Commerce.) This piece of legislation, along with supporting amendments to other pieces of legislation, resulted in a network of restrictions that came to be referred to as the crude oil export ban. 6
A cascade of initiatives (such as lowering highway speeds, converting oil power plants to coal, construction of nuclear power plants, and completion of the Trans-Alaska Pipeline System) aimed at achieving energy independence were also authorized and executed in the decades that followed.7
More recently, there have been major advances in technology (a combination of hydraulic fracturing, horizontal drilling, and seismic imaging), which have quickly opened up vast resources of oil. Today, there is an excess supply of crude oil in the United States.8
The crude oil export ban was predicated on a threat to national security that existed in 1973. In 2014 however, the energy scarcity and therefore the national security risk that justified the ban is no longer a reality.
The ban therefore violates the Export Taxation Clause of the United States Constitution.
II. THE ANATOMY of the EXPORT TAXATION CLAUSE
A. The text
According to the Export Taxation clause of the United States Constitution, “No Tax or Duty shall be laid on Articles exported from any State.” 9
B. Framers’ Intention
The Export Taxation Clause was one part of the collection of efforts (known as the commerce compromise) made by the Framers to try to ensure unity across the nascent union. At the time the clause was debated, the South would have borne a disproportionate burden from export taxes due to its position as the primary exporter of goods (cotton).10 Many of the Southern delegates at the Constitutional Convention regarded this clause as a prerequisite to approval of the Constitution.11 Other arguments in favor of inclusion of the clause were that a tax on exports would create a mechanism through which the more numerous Northern states could overwhelm the Southern states’ economies; that export taxes could be used indirectly to attack slavery; and that export taxes would stifle industry. 12
In contrast, some of the most distinguished delegates at the Convention, including James Madison, Alexander Hamilton, and George Washington, argued that export taxes were a necessary source of revenue, a necessary means for the federal government to regulate trade, and a potentially necessary source of income for the central government.13
At final count, the absolute prohibition on export taxation passed by a 7–4 vote.14
C. Interpretation by the Court
Although the original purpose of the Export Taxation Clause was primarily to prevent favoritism by Congress, the Supreme Court has chosen to enforce the flat ban that the Framers wrote into the text.
In the mid-nineteen nineties, two oft-cited cases were decided that cemented the principle that any tax or duty falling on exports during the course of exportation is prohibited:
In United States v. IBM Corp., the Court struck down a nondiscriminatory federal excise tax on insurance premiums against loss of goods during exportation, saying, “It is best to prohibit the National legislature in all cases from imposing export tariffs.”15
The facts of the case were that International Business Machines Corporation (IBM) shipped products manufactured in the United States to foreign subsidiaries and insured those shipments against loss. When the foreign subsidiary made the shipping arrangements, the subsidiary often placed the insurance with a foreign carrier. When it did, both IBM and the subsidiary were listed as beneficiaries in the policy.
The IRS audited IBM and determined that the premiums paid to foreign insurers were taxable and that IBM–as a named beneficiary of the insurance policies–was liable for the tax. IBM paid the assessments and filed refund claims, which the IRS denied.
IBM then commenced suit in the Court of Federal Claims, contending that applying a tax to policies insuring its export shipments violated the Export Clause.
In the spotlight was the Court’s decision in Thames & Mersey Marine Ins. Co. v. United States.16 In Thames & Mersey, the Court had found that “proper insurance during the voyage is one of the necessities of exportation” and that “the taxation of policies insuring cargoes during their transit to foreign ports is as much a burden on exporting as if it were laid on the charter parties, the bills of lading, or the goods themselves.”17
The Government argued that the Court had historically interpreted the Commerce, Import Export, and Export Clauses in harmony, so that Thames & Mersey had been superseded by decisions interpreting those other clauses.
The Government asked the Court to reinterpret the Export Clause to permit the imposition of generally applicable, nondiscriminatory taxes as allowed under the Commerce Clause and the Import Export Clause.
The Court heard this case to decide whether it should overrule Thames & Mersey.
The Court accepted that it had shifted its interpretation of the (dormant) Commerce Clause but that it should not, and indeed cannot, govern the interpretation of the Export Clause.
The Court reasoned that the Import Export Clause was intended to protect federal supremacy in international commerce, to preserve federal revenue from import duties and imposts, and to prevent coastal States with ports from taking unfair advantage of inland States, while the Export Clause served different goals.
The Export Clause specifically prohibits Congress from regulating international commerce through export taxes, disallows any attempt to raise federal revenue from exports, and has no direct effect on the way the States treat imports and exports.
The Court stated that Thames & Mersey had been controlling precedent for over 80 years, and declined to overrule.
In United States v. United States Shoe Corp., a unanimous Court struck down (to the extent it applied to exports) the Harbor Maintenance Tax (HMT), rejecting the government’s argument that the charge for any “port use” was a user fee rather than a tax.18
The HMT obligated exporters, importers, and domestic shippers to pay 0.125 percent of the value of their commercial cargo.19 It was collected by the Customs Service and deposited in the Harbor Maintenance Trust Fund, from which Congress paid for harbor maintenance and so on.
United States Shoe Corporation argued that, to the extent the toll applied to exports, it violated the Export Clause. The Customs Service argued that the HMT was a statutorily mandated user fee, not an unconstitutional tax on exports.
The Court noted that a “user fee” would lack the attributes of a generally applicable tax or duty and instead be designed as compensation for government-supplied services, facilities, or benefits see Pace v. Burgess.20 The HMT, however, was a tax, and thus violated the Export Clause as applied to exports.
Thus, the Export Taxation Clause of the U.S. Constitution clearly and simply prohibits Congress from imposing taxes on exports from any state.
III. APPLICATION of the EXPORT TAX CLAUSE to THE CRUDE OIL EXPORT BAN of 1975
A. Ban as tax
As Adam Smith observed in the Wealth of Nations, “the exportation of the materials of manufacture is sometimes discouraged by absolute prohibitions, and sometimes by high duties.”21
We can think of a ban as an infinitely high tax: an export duty so high that it halts export altogether. We can then examine the ban in light of the Export Taxation Clause.
B. Statutory components of the ban
The Energy Policy and Conservation Act (EPCA) of 1975 is the legislative centerpiece of the ban and is most relevant here.
Other statutes that can be regarded as part of the codification of the ban include the Export Administration Act of 1979 (P.L. 96-72), which provides legal authority to the President to control U.S. exports for “reasons of national security, foreign policy, and/or short supply” and the Mineral Leasing Act of 1920 which was amended to reflect the restrictions on exports put into place by a version of the EAA that was passed in 1969.22,23
These three statutes enabled the so-called “short-supply controls” to be put into place. The short-supply controls are composed of the Export Administration Regulations (EAR) of the Bureau of Industry and Security (BIS) (an agency of the Department of Commerce).24
The EPCA effectively bans crude oil exports to all countries except Canada. (The export of refined products, such as gasoline, diesel, and jet fuel is allowed.) In nearly all cases, U.S. crude oil can only be exported if the BIS finds that proposed exports are “consistent with the national interest and the purposes of the Energy Policy and Conservation Act.” The agency has the right to accept or reject applications for an export license according to (its own definition of) the “national interest.”25
Also under the EPCA, the President was permitted to restrict exports of coal, petroleum products, and natural gas. 26
Despite the existence of this piece of legislation, under the strict interpretation of the Export Tax Clause, the ban (in the form of an infinitely high tax) would be illegal. However, the Court makes an exception for national security.
C. The exception for national security
The Supreme Court has allowed the President, with Congressional authority, to declare embargoes for reasons of national security.
In United States v. Curtiss-Wright Export Corp. (1936) the Supreme Court concluded that the President of the United States has “plenary” powers over foreign affairs.27
Congress had authorized the President to place an embargo on arms shipments to South American countries engaged in the Chaco War. President Franklin Roosevelt proclaimed such an embargo.
The facts of the case were as follows: Curtiss-Wright Export Corporation was charged with conspiring to sell fifteen machine guns to Bolivia. It argued, in its defense, that Congress had improperly delegated legislative power to the executive branch.
Making a distinction between internal and foreign affairs, Justice Sutherland stated that because “the President alone has the power to speak or listen as a representative of the nation,” Congress may provide the President with a special degree of discretion in external matters which would not be afforded domestically.
In Federal Energy Administration v. Algonquin SNG, Inc. (1976)
the Court validated presidential restrictions on oil imports, based on the broad congressional language delegating authority to the executive branch in the Trade Expansion Act of 1962.28
Section 232(b) of the Trade Expansion Act of 1962, as amended by the Trade Act of 1974, provides that if the Secretary of the Treasury finds that an “article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security,” the President is authorized to “take such action, and for such time, as he deems necessary to adjust the imports of (the) article and its derivatives so that . . . imports (of the article) will not threaten to impair the national security.” 29
In Regan v. Wald (1984) the constitutionality of the president’s regulations restricting travel to Cuba were upheld expressly on the ground that they had been authorized by Congress.30
The Trading With the Enemy Act of 1917 gave the President broad authority to impose comprehensive embargoes on foreign countries as one means of dealing with both peacetime emergencies and times of war.31 Section 5(b) was amended in 1933 later to limit the President’s power to times of war. However, at the same time, the International Emergency Economic Powers Act was enacted to cover the President’s exercise of emergency economic powers in response to peacetime crises if he declared a national emergency.32
The Reagan Administration did not follow the procedures required under the IEEPA when it issued its Cuba travel regulation in 1982. The Administration prohibited travel-related financial transactions.33
However, the Administration argued, its regulation was valid under a ”grandfather clause” in the 1977 law providing that, “authorities conferred upon the President…may continue to be exercised.” 34
President Carter had lifted Cuban travel restrictions in March of 1977. On the key date, July 1, ”the Government was not restricting travel to Cuba,” and therefore the clause did not apply.35
So, although the travel ban was not valid under the legislation, the Reagan administration argued that the regulation was needed to deny Cuba the hard currency it required to ”finance destabilizing activity in Central America and the Caribbean region.” The Court agreed.36
1. The national security justification for the crude oil ban of 1975
a. Relationship with the Middle East oil kingdoms
The enactment of EPCA, which enshrined the ban, was a direct response to the 1973 oil crisis.
The event that precipitated the crisis, sometimes referred to as the “oil price shock,” was an embargo imposed by Arab members of Organization of Petroleum Exporting Countries (OPEC) against the United States in retaliation for the U.S. decision to re-supply the Israeli military for its war with Egypt and Syria (the “Yom Kippur” war).37
The embargo’s organizers linked the embargo’s end to successful U.S. efforts to bring about peace between Israel and its Arab neighbors. Saudi Arabia was a leading proponent of the embargo.38
Initial discussions between Kissinger and Arab leaders began in November 1973. The Nixon administration began negotiations with key oil producers to end the embargo and simultaneously began negotiations with Egypt, Syria, and Israel to secure an Israeli retreat from the Sinai and the Golan Heights. 39
Though a finalized peace deal between Israel and its Arab nations failed to materialize for Nixon and Kissinger, negotiations culminated with the First Egyptian-Israeli Disengagement Agreement on January 18, 1974. The prospect of an end to hostilities between Israel and Syria proved sufficient to convince the relevant parties to lift the embargo in March 1974.40
b. Unpredictable oil Prices
The key to United States’ vulnerability was an inability to smoothly maintain the price of oil. The fiscal policies of President Nixon had set the stage.
As Nixon took office in 1969, the inflation rate had risen to 5 percent.41 Unemployment had risen from 3.5 percent to 5 percent. In an attempt to remedy this situation, President Nixon decided to manipulate currency.42
In 1971, President Nixon did three things pursuant to the Economic Stabilization Act of 1970.43 He placed a 90-day freeze on all wages and prices, subjected wage and price increases to mandatory guidelines, and ended the convertibility of the U.S. dollar into gold.44
The price of gold had been fixed at $35 an ounce since the Roosevelt administration. But the growing U.S. balance-of-payments deficit meant that foreign governments were accumulating dollars that exceeded the U.S. stock of gold.45In the second week of August 1971, the British ambassador is reported to have literally turned up at the Treasury Department to request that $3 billion be converted into gold.46
Shutting the gold window meant that the value of the U.S. dollar fell in world markets. This helped stimulate American exports, but it also made imports more expensive. Inflation subsided temporarily, but the recession continued.47
Nixon then reversed course and adopted an expansionary monetary and fiscal policy. Inflation resumed its upward spiral.48
The oil embargo combined with the economic environment sent the price of oil per barrel sky high. The price of oil doubled then quadrupled: from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974.49,50
The structure of the nation’s economy was destabilized.
c. Paucity of energy resources
The lack of oil from the Middle East due to the embargo acutely strained the U.S. economy. This stranglehold on the global petroleum supply by Arab oil kingdoms was clearly regarded as a national security issue until as late as 1980.
President Carter would remark, in his 1980 State of the Union address, that “An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America. Such an assault will be repelled by any means necessary, including military force. 51
2. National Security landscape today
Imports from the Middle East are still falling.52 Of the top ten countries that send oil to America, only three are Middle Eastern nations; Canada exports the most to the United States. 53
By limiting supply, OPEC was able to cause oil price spikes in the 1970s and ’80s. But it has much less power today. 54
Today, Saudi Arabia is one of the closest U.S. allies in the Middle East and has made adjustments to production and pricing to maintain stability.55,56
b. Oil prices
Oil prices are currently falling. World oil production today is 50 percent higher than it was in 1973.57
But in the 1970s, as a result of prices that were soaring, exploration and drilling began in more remote places such as Alaska, the North Sea, the Gulf of Mexico, and the Canadian oil sands. 58,59
By the fall of 2013, U.S. oil production was recognized as a moderator of global oil prices, insulating the U.S. and other countries from the volatility of OPEC and non-OPEC production outages.
c. Paucity of resources
1. Since 1973: preservation of existing resources
Energy resources became less scarce as the initiatives begun under the auspices of the EPCA took hold. A steep decline in U.S. oil imports began in 1980.59
Crude oil harvested from inside the United States was now refined inside the United States; automakers were required to raise mileage from 13.5 miles per gallon to 27 mpg (recently, standards were doubled, and vehicles must average 54 mpg by 2025). A national 55-mile-per-hour speed limit on U.S. highways was imposed.60
U.S. electric utility companies replaced petroleum fuel oil with USA coal, nuclear energy, and natural gas to power their generators. The USA no longer depends on petroleum to generate electricity for the power grid.61
2. Since 2012: surge in crude oil resources
U.S. crude oil proved reserves are now the highest since 1976. The 2012 increase of 4.5 billion barrels was the largest annual increase since 1970, when 10 billion barrels of Alaskan crude oil were added to U.S. proved reserves. 62
[Proved reserves are volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.]63
Vast resources of light, sweet crude oil are now available in the United States. These “tight” oil deposits are primarily in North Dakota (the Bakken play) and Texas (the Eagle Ford play and the Permian play).64
Contributing factors to higher crude oil reserves include increased exploration for liquid hydrocarbons, improved technology for developing tight oil plays, and sustained high historical crude oil prices.65
Exporting crude oil no longer creates national security vulnerability.
The current coordinated energy security system among the industrialized countries has ensured that stability and security has been and will be preserved in the event of a crisis of oil supply.
Energy security does not require zero imports or zero exports. It requires independence from imports that could directly or indirectly place the U.S. in a position of economic, political, or military vulnerability.
It is clear that the United States is no longer vulnerable to the same situations that originally caused the ban to be put into place. The export of crude oil no longer poses a national security threat. The crude oil export ban therefore violates the Export Taxation clause of the US constitution and is presently illegal.
1. Winston Churchill, 1915. Quoted by Joel Rayburn in “The Last Exist From Iraq,” Foreign Affairs March/April 2006.
2. U.S. Energy Information and Administration. Total Energy. Energy Perspectives 1949-2011. http://www.eia.gov/totalenergy/data/annual/perspectives.cfm
3. Lester R. Brown. WORLD ON EDGE. HOW TO PREVENT ENVIRONMENTAL AND ECONOMIC COLLAPSE. Chapter 9. http://www.earth-policy.org/books/wote/wote_data]
4. Op Cit. 2
5. U.S. Department of State. Archive. Second Arab Oil Embargo, 1973-1974. http://2001-2009.state.gov/r/pa/ho/time/dr/96057.htm
6. P.L. 94-163.
7. Richard Nixon. Address to the Nation About National Energy Policy.
November 25, 1973. http://www.presidency.ucsb.edu/ws/?pid=4051
8. Michael Quentin Moreton in GeoExPro. UNLOCKING THE EARTH- A SHORT HISTORY OF HYDRAULIC FRACTURING. http://www.geoexpro.com/ articles/2014/02/unlocking-the-earth-a-short-history-of-hydraulic-fracturing
9. U.S Const. art. I, §9, cl. 5.
10. Pamphlets on the Constitution of the United States 333, 367 (Paul Leicester Ford ed., Da Capo press 1968) (1888)
11. James Madison, NOTES ON THE CONSTITUTIONAL CONVENTION (June 18, 1787), reprinted in The Records of the Federal Convention of 1787, at 308 and 374 (Max Farrand ed.,rev. ed. 1937)
12. Ibid, at 286, 580, 592.
13. Ibid, at at 306-7.
14. Ibid, at 363
15. 517 U.S. 843
16. 237 U.S. 19
17. Ibid, at 27
18. 523 U.S. 360
19. 26 U. S. C. §446
20. 92 U. S. 372.
21. Adam Smith, Edited by JC Bullock. AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS, BOOK IV. II. OF RESTARINTS UPON THE IMPORTATION FROM FOREIGN COUNTRIES OF SUCH GOODS AS CAN BE PRODUCED AT HOME. http://www.bartleby. com/ 10/402.html.
22. 42 U.S.C. § 6212
23. 30 U.S.C. § 181 et seq.
24. Bureau of Industry and Security. Export Administration Regulation Downloadable Files. Part 754. http://www.bis.doc.gov/index.php/ regulations/export-administration-regulations-ear
25. Op.Cit. 6 §754.2
26. Op.Cit. 6 §754.2 and Supplement 1.
27. 299 U.S. 304
28. 426 U.S. 548
29. 19 U.S.C. § 1801
30. 468 U.S. 222
31. 12 U.S.C. § 95a–95b and 50 U.S.C. App. §§ 1—44 TWEA
32. Title II of Pub.L. 95–223, 91 Stat. 1626, IEEPA
33. TK
34. §101(b), (c) of Pub. L. 95–223
35. TK
36. TK
37. OPEC Oil Embargo 1973–1974″. U.S. Department of State, Office of the Historian. http://history.state.gov/milestones/1969-1976/oil-embargo]
38. U.S. Department of State. Office of the Historian. Milestones: 1969–1976. Oil Embargo, 1973-1974. https://history.state.gov/milestones/1969-1976/oil-embargo
41. Inflationdata.com. http://inflationdata.com/articles/inflation-cpi-consumer-price-index-1960-1969/
42. U.S. Dept. of Labor. Bureau of Labor Statistics. Unemployment rate. http://data.bls.gov/timeseries/LNU04000000?years_option=a ll_years&periods_option=specific_periods&periods=Annual+Data
43. Pub. L. 91-379, title II, Aug. 15, 1970, 84 Stat. 799 (12 U.S.C. 1901 note)
44. Sandra Kollen Ghizoni. Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls. Federalreservehistory.org. http://www.federalreservehistory.org/Events/ DetailView/33
45. Nixon and the End of the Bretton Woods System, 1971–1973. U.S. Department of State, Office of the Historian. http://history.state.gov/milestones/1969-1976/nixon-shock
46. Henry Brandon, THE RETREAT OF AMERICAN POWER at 224 (1973)
48. Op.Cit. 41 at http://inflationdata.com/articles/inflation-cpi-consumer-price-index-1970-1979/
49. Op.Cit 38
50. Karen Merrill. THE OIL CRISIS OF 1973-1974: A BRIEF HISTORY WITH DOCUMENTS. (2007).
51. Jimmy Carter, State of the Union Message, 96th Cong., 2d Sess. (January 23, 1980).
52. U.S. Energy Information Administration. U.S. imports by Country of Origin. http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbbl_m.htm
53. U.S. Energy Information Administration. Company level imports. http://www.eia.gov/petroleum/imports/companylevel/
54. Jennifer Warren. THE OPEC OIL MARKET GAMBIT. Energy Trends Insider. http://www.energytrendsinsider.com/2014/10/14/the-opec-oil-market-gambit/
56. Thomas W. Lipmann. SAUDI ARABIA ON THE EDGE. THE UNCERTAIN FUTURE OF AN AMERICAN ALLY.
57. U.S. Energy Information Administration. Monthly Energy Review October 2014 / 40th Anniversary Issue at 148.
58. U.S. Energy Information Administration. Critical Petroleum Related Events and U.S. Refiner Acquisition Cost. http://www.eia.gov/pub/oil_gas/ petroleum/analysis_publications/chronology/petrochrohotgraph.htm
59. U.S. Energy Information Administration. PETROLEUM CHRONOLOGY OF EVENTS 1970 – 2000. http://www.eia.gov/pub/oil_gas/petroleum/ analysis_publications/chronology/petroleumchronology2000.htm
60. Op Cit. 58
61. U.S. Energy Information Administration. What is U.S. electricity generation by energy source? http://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3
62. . U.S. Energy Information Administration. U.S. Crude Oil and Natural Gas Proved Reserves, 2012 http://www.eia.gov /naturalgas/crudeoilreserves/pdf/ uscrudeoil.pdf
Follow Dan Eberhart